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The news flow was dominated by the US election this week. After a strong debate performance, Kamala Harris went from being a slight underdog to having a 50% chance of winning on the Polymarket election prediction site. Coin flips are always hard to invest around. As such, markets have not been reacting much to the US election and I wouldn’t expect them to do much until the result is in. A Trump victory remains better, on balance, for US assets and worse for non-US assets but it is risky to position for that today, especially if the Harris momentum continues.
Instead, this week I thought I would step back a bit and write about the last few months in markets. One of the dominant themes has been a gradually slowing economy and slowly rising unemployment. The problem is not where we are today but where, if these trends continue, we might be heading. I think there are reasons to be optimistic here but equally, unemployment has risen by enough in the US to signal, statistically at least, a recession is likely to be on its way (it was the economist Claudia Sahm who made this relationship famous). So, equities have fallen a little in September. But fixed income investments have made money as have, helpfully, our alternative assets.
My point is that this relationship: equities down, fixed income up is very much a return to normal. Indeed, the first half of the year saw the opposite (equities up, fixed income down) as growth proved to be strong and interest cuts were delayed. Balanced portfolios have indeed had some balance in 2024. This was, of course, not the case in 2022 when equities and bonds fell together. It is worth noting just how exceptional 2022 was for investors. The chart below shows that there have only been 3 years since 1926 when equities and bonds have fallen together. Crudely, there is a 97% chance the current environment continues into next year. If a recession does indeed arrive, at least fixed income is likely to do the job of cushioning some of the blow.
Part of the reason that people worry about a growth slowdown is that interest rates remain very high relative to the last 20 years. It is still the case that mortgage borrowers and companies are rolling off older fixed rate borrowing and onto new higher fixed rates. This means the squeeze from higher interest rates continues even though the Bank of England started cutting in August and the US Fed (barring a miracle) will follow them this month. The good news is that, with inflation much more stable, they have room to cut. Here are the latest market and Goldman Sachs’ forecasts for the UK for example:
Hopefully these cuts might be a (partial) cushion to whatever Labour throws at us in the October budget. And October is very much autumn. Winter is on its way. To give you some crumb of comfort here, I was very struck by research this week that shows the warmer the temperature (and I’d guess the exam room?), the worse the results for the students sitting exams. This tallies with my experience that it is harder to work on those super-hot days when you have no air conditioning. At least they are behind us for while! And I for one might be secretly turning down the air conditioning temperature at IPS on Monday
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.
