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This week, why equity markets are going up and why our children (or perhaps grandchildren) should live longer than we will. On equity markets, I will keep this brief. As I write, the US has almost five rate cuts priced in (and Jay Powell did little to disabuse that expectation this week). Meanwhile, we had very normal looking initial claims jobs data this week (after a sharp jump last week) and the latest Atlanta Fed GDPNow projection looks like this:
This is a picture of above trend US growth with interest rate cuts on the way. I would not expect equity markets to be weak given this backdrop and they are not. The other point that jumps out to me is that viewed through this lens the US looks to be in better shape than the UK or Europe. So, it does not surprise me that the outperformance we saw from European equities in the first half of the year has dried up recently: US equities are over 4% ahead of their European equivalent quarter to date.
Part of the reason for this is that the Eurozone looks to be at the end of its cutting cycle so there is less low interest stimulus to come. But at least Eurozone interest rates are back to 2% now. The challenge we face in the UK is that our starting point is similar to the US (4.0% over here vs 4.25% over there) but we have only one cut to come and even that is very conditional on inflation coming back nearer target. This means the interest burden looks like it will stay higher for longer here than it will do for our competitors:
In my head, higher growth, and higher rates go together. So, the relationship between the US and Europe looks about right to me. Unfortunately, low growth UK will have the highest rates of all in 2026 if the market is right. And, of course, higher interest bills for the government will mean higher taxes for us. I struggle to see how that will help with the growth story. The only crumb of comfort I have is that if the inflation picture does improve in the UK then we will have more upside from rate cuts.
There is also an increasing likelihood I will get to see this improvement if and when it ever happens. Here are a couple of data points that I saw this week that I think will have a meaningful impact on human lifespans. First, Novo Nordisk announced this morning a pill that has similar effects to its injectable Wegovy weight loss drug. Obesity is linked to a plethora of poor health outcomes, and a pill should be cheaper and easier to take. But the pill has similar side effects, and one concern has been if you stop taking the drug do you just put the weight back on? A recent study of 140,000 patients says no. 57% stay the same or actually continued to lose weight after coming off the drug. This is unambiguously good news.
And one other major mortality factor are road accidents. Some data was released on the safety levels of (autonomous, self-driving) Waymos compared to ordinary human drivers on like for like streets in San Francisco. I was not surprised to learn that Waymos were safer. But a neurosurgeon, Dr Jon Slotkin, took these results and extrapolated them to all the US. His estimate was that if the whole country were using Waymos there would be around 35,000 fewer road fatalities a year. The toll on the health system and economy of this is, of course, enormous (not to mention the individual human tragedies involved). When approving technologies like this there are, of course, plenty of concerns about the problems it might bring. But it is worth remembering that the easy thing to do (delay, ask for more information, put the decision off) has a cost too and the cost here looks pretty high to me. If these results hold up, I’d expect and hope to be seeing driverless cars being rolled out in Europe as soon as we can.
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.
