Market Commentary

“What You Gain On The Swings, You Lose On The Roundabouts.” – Robert Jordan (US Author), from his book “The Path of Daggers”.

Angels on the sideline,Baffled and confused.Father blessed them all with reason,And this is what they choose? – Right in Two (Tool). At the end of January 2018, we highlighted how a number of seemingly contradictory things were happening in US asset markets; shortly thereafter the Dow Jones Index fell around 13% peak to trough in the space of just 5 trading days. We appear to back in twilight zone mode once again – in the last week, both the Dow and the S&P 500 have achieved major Index milestones (27000 and 3000 respectively) and are already heading towards the next “psychological” levels at what appears to be escape velocity.

“Currency Manipulation is what Bertrand Russell called an “emotive conjugation” and Bernard Woolley called an “irregular verb”:* I am cutting interest rates* You are trying to achieve a competitive devaluation* He/she/it is manipulating their currency to obtain an unfair advantage”. – John Kemp (Analyst)

“If there must be madness, something may be said for having it on a heroic scale” – J.K Galbraith (The Great Crash of 1929). There has been plenty of negative news over the last few months and an even bigger list of issues over the last year or so, but (US) markets appear blithely unconcerned; despite the litany of calls for a decline, (or a crash), nothing appears to dent sentiment and the buying continues.

Hubris is interesting because you get people who are often very clever, very powerful, have achieved great things, and then something goes wrong – they just don’t know when to stop – Margaret MacMillan (Canadian historian and Oxford University Professor). [The following analysis focusses on equities for the sake of brevity, but the points made are equally relevant to Bond Index funds and ETFs].

“It is not the strongest or the most intelligent who will survive, but those who can best manage change.” ― Leon C. Megginson (Business Professor 1991-2010). The price war between asset managers has been fierce in recent years but has been more aggressively fought in the passive arena- as this article noted late last year, Active fees have fallen by less than those of Passive funds, despite starting from a higher base. Like an eye-witness to a major catastrophe, the Active managers appear to be in a state of numbed incomprehension, unable to process what is happening to them. Meanwhile “feemageddon” as it has been dubbed, rolls on relentlessly; Passive funds have taken huge bites out of Active Manager’s assets, as investors wise up to the cost (as well as the returns) differentials.

“We have to work towards free trade because otherwise we will miss out on many opportunities for cooperation, and relations amongst countries will become much more difficult” – Lee Hsien Loong (Prime Minister of Singapore).

With the S&P 500 Index having just touched all-time highs and Donald Trump deciding that now is a good time to demand a cut in interest rates by 1% and to re-start QE, contrasting their timidity with that of the Chinese Central Bank, averring that the US economy would go up “like a rocket” if they followed his advice. This would appear to be akin to fighting a fire with gasoline, but that doesn’t mean the Fed won’t do it anyway, (though not this week it seems!)Outside of US markets, however, things are not quite so rosy, as indicated by the fact that the MSCI World Index ex-US Index is nearly 11% below its highs (reached in January 2018), and nearly 20% below its 2007 highs, indicating that, once again, the US is leading the charge higher.