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I have written here about Trump (of course), tariffs, Rachel Reeves, national insurance increases, government bond deficits, interest rates and plenty of other headline-grabbing and market-moving events. But this onslaught of news and surprises can mean that you can sometimes lose a sense of the bigger picture. I thought it would be helpful this week to step back a bit and give a (brief) summary of the year so far. As ever, if you are a client and have questions or want more colour then please do get in touch. Otherwise, here are a selection of year-to-date returns:
What stands out to me here? Firstly, most equity markets are up for the year. Even the US S&P 500 is up 1% today. I rather cheekily showed the US return above in sterling terms rather than the local US dollar return. Still, for British based sterling investors (who make up the majority of our clients) this is your actual return on your US equity investments as sterling has now strengthened back to pre-Brexit levels. And the Euro, which has benefited from the German stimulus package, has rallied even more. After many years of out-performance many global investors were heavily overweight US assets. Trump has meant that plenty of international investors have had second thoughts and started to bring some money back home selling dollars and buying Euros and pounds.
Equity markets are strong because – I think – the real economy still remains in decent shape. The risk is of course that the tariff impact is delayed and we start to see problems in the second half of the year. But if this is the case, equity markets do not look too worried about it today. One reason is that the hard data we see is still holding up. As an example, here is the latest Atlanta Fed prediction for US GDP. A number of between 2% and 3% for this is pretty much business as usual:
The other thing that may surprise my regular readers is that bond markets are up for the year both in the US and UK. I wrote last week about longer term bond yields pushing over 5% as government deficits show no signs of coming down any time soon. I am not sure the noise on this will go down: there are plenty of reasons to worry about large government deficits and I’d expect this issue to be front and centre in future political campaigns. But there are three things that bonds have going in their favour. First, (as I wrote last week) you can earn guaranteed yields of inflation plus 2% or more today. This is pretty attractive compared to some of the alternatives out there. Second, this yield is enough to cushion the blow if (as has happened this year in the UK) bond prices fall. And finally, when tariff worries were at their height post Liberation Day, bonds started to make money as recession fear rose. A recession hedge with returns that can beat inflation remains a pretty attractive portfolio asset. I wouldn’t say we love bonds here but if you worry (as I do) that growth may start to slow down then they definitely have a place in your portfolio.
Finally, a word on alternatives. Gold remains a standout performer as global central banks look to reduce their exposure to the US dollar. But aside from this, commodities remain noticeably weak. As an example, oil is over 50% below its 2022 highs for sterling buyers and back to its pre-Covid levels.
Lower energy costs are of course a form of stimulus for the global consumer as less money spent on petrol and heating is more money to spend elsewhere. This mix of lower energy and steady growth is pretty market-friendly. We will see if it holds up for the second half of the year, but if I am asked why equities remain strong in spite of everything that has been thrown at them, I think this is part of the story.
Chris Brown, CIO
cbrown@ipscap.com
The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.
