Hello, it's Friday the 16th of August. I thought we'd pause for just a few moments and reflect on what's been going on in markets in the last few days.
Well, they say a week is a long time in politics, evidently it is a long time in investment markets as well. We've had a tumultuous couple of weeks with some substantial falls about eight or nine trading days ago, and then a gradual, but pretty robust recovery from that.
Back where we were…
To cut a long story short, we've basically ended up where we started. August to date, equity markets in most instances are basically flat. Japan is still a bit underwater of course, and in fact the US S&P 500 is only a couple of percentage points off its all-time highs.
We had some dramatic falls, and then some pretty substantial and consistent gains on the way back out of the recent market nadir. Clearly there's a lot of analysis that goes on, with people trying to pick through the bones and work out what happened in the first place. We spent some time doing that in the last video and likewise on the way back out again, trying to divine where the positivity came from. It probably again comes back to sentiment rather than focusing on any one particular bit of data, of which there has been plenty over the last couple of weeks, and which has painted a broadly constructive picture.
Muddling around and ‘okayish’ levels…
But it's only as constructive as the data a couple of weeks before that, which was not constructive. Essentially, it's all bumbling around the middle and muddling through and sort of ‘okayish’ levels. To give you a flavour, we've had GDP data, we've had employment, we've had inflation, all sorts coming out over the last few weeks. And the picture is of people still being largely fully employed in the developed world. We are generally now seeing wage increases that are looking similar to real wage growth, if not exceeding inflationary levels. This paints a reasonable picture in terms of consumption.
Particularly in the developed world, consumption is a very important part of GDP and also a very important part of stock markets. If you think about where revenue from a business comes from, a lot of it will come from the first or second derivatives of that consumer spending. And so not only is it a positive feature of GDP, it creates revenue for businesses.
Looking long term for a more balanced view
If businesses do a good job of translating that through to their profit margins, that's how you see a positive story for stock markets. And when you think about big moves down or up, you've got to always bear in mind what stock markets represent. For example, when you think about the UK, the main board is around about 100 of the largest companies listed in the UK. The S&P is around about 500 companies listed in the U.S. So, when you see these big moves, it's quite a strong message, because those stock markets are an amalgamation of very long-term expected cashflow from those businesses. In reality, businesses are set up and they don't have a prescribed end date in most instances. So, it's a long-term, almost perpetual potential income stream, across an average of 500 or 100 businesses. For all of those businesses on average to have a sudden impact that means that the value of those very long-term cashflows is substantially lessened arguably looks to us a little bit overdone.
Clearly on a company-by-company basis, businesses do go to the wall and they have particular idiosyncratic issues. That's why we think it's always worth looking for active managers in each of these asset classes and sub-asset classes, because it makes sense to have the opportunity to choose judiciously where you can. But when you think about the index, and you think about the average of all those businesses, big moves on the way down, and indeed on the way up, are often overdone because it is over-emphasising the short-term noise in a very long- term income stream.
Lower inflation is good news
The one bit of information that is quite interesting looking at the UK market, without again getting into the minutiae, is the inflation print we saw this week coming in lower, which is positive, but most importantly, the services component of that inflationary data came down quite substantially over the last month.
This reflects the fact that monetary policy is having an impact perhaps, because when you think about goods, you think about the components of that, and arguably monetary policy doesn't have a link to the price you pay for oil. Your domestic monetary policy isn't going to have a big impact on that perhaps because it's a global market, but clearly services are often a bit more parochial, a bit more locally focused. And so you could see that there's a more likely linkage between monetary policy and the price of services. And they've been sticky, staying resolutely higher than the government or the central bank would have liked. But you're starting to see that come down now, which arguably gives a little bit more breathing space to the Bank of England when it is thinking about its monetary policy from here.
That's it for me. Have a good weekend when you get there, and we'll see you next time.
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