Hello, it's Thursday the 22nd of August. I thought we'd pause for just a few moments and reflect on what's been going on in markets this week. The main topic of conversation is the Jackson Hole Symposium. If you don't know much about it, it's a bit like Davos, but focused around central bankers and interest rate policy. So a bit less glitzy.
It's nestled in mountains like Davos, but in Wyoming rather than Switzerland, and there are fewer A-listers buzzing around and arguably fewer private jets as well. But nevertheless, and despite the lack of glamour, arguably Jackson Hole is going to be more impactful for investment markets, certainly over the short-term, than Davos. While Davos thinks about big picture star gazing and long-term thematic approaches, Jackson Hole is dealing ultimately with the most important questions about investment markets that really impact as of today. That's particularly important when it comes to the US. We seem to be poised at the start of an interest rate cutting cycle in the US, and clearly everybody's pronouncements and comments as they sit in or leave these various events are going to be pored over to give us more information in terms of what happens next for US interest rates.
If you wanted to check the stress levels of the average Jackson Hole participant this year, you'd find they're probably much less stressed than they were a year ago. Cast your mind back to this time in 2023, and we still had some sticky levels of inflation. It had come off the top, but there was still a genuine concern that inflation would bump up again and go out of control. And that's why you saw such aggressive interest rate policies maintained or even increased throughout 2023.
Sticky inflation vs overcooking the situation
This year arguably, the concerns are less around sticky inflation. Although there are some persistent bits here and there, overall, inflation is largely back down to around target levels. The concerns are more about making sure it doesn't get overcooked, that you don't impact growth too greatly or cause significant unemployment, which clearly we haven't seen yet, and obviously central banks will be be keen to avoid. So there'll be loads of detail and minutia being raked over. But, overall, I think it's fair to say the picture in terms of global economies in terms of interest rates, is pretty reasonable.
If you cast your mind back over the last few years, we had a big spike in inflation as we exited Covid. The original presumption was that it would be a transient spike, but it proved to be stickier than originally anticipated, and then arguably central bankers were behind the curve and had to run to catch up. And they did, very aggressively, increase interest rates to the sorts of order of magnitude we haven't seen for decades really, particularly when you consider how low a base we came from.
Despite that concerted aggression from central banks around the world, inflation has come down, but we haven't seen economies tip into meaningful recessions anywhere in the developed world. So, it is interesting when we talk about interest rate policy and the impacts and the nervousness around the state of the US economy in particular. The question is, have we had a hard landing or a soft landing? Or will we have a hard landing or a soft landing?
A soft landing or a hard landing?
Arguably, if you think about the big picture here, we have already had that soft landing in the US. Inflation has come down materially, without a substantial impact in terms of the overall economy and with full employment still. There might be a short period where you see some negative growth – a recession in a technical sense perhaps, much as we did in the UK early this year – but it's not a meaningful and substantial destruction of value in society. And so arguably, we've had that soft landing already in many ways.
In terms of thinking about how interest rate policy has been applied through this cycle, it's quite interesting to see the differences that we've seen over the last few years with a much more open and communicative approach from central banks. The orthodoxy was always that they needed to surprise people with the interest rate policy in order to have the maximum impact. But the amount of rhetoric and careful hand-holding that central bankers have used over the last couple of cycles to try and take us on a journey with them and reduce the likelihood of surprise, demonstrates a real change in tone for how interest rate policy is applied now in many of these large central banks.
The final thing to think about is the aggressive increase in interest rates a couple of years ago now. We have seen inflation reduce substantially from those elevated levels, but there are still question marks as to whether there was a genuine linkage between that pull up and then pull down of headline inflationary forces and the impact of monetary policy. If you think about the main components of that headline inflationary spike, things like oil and grain prices demonstrate arguably more of an unwinding of supply chain disruption and a resetting of supply and demand dynamics rather than domestically orientated inflationary forces, which arguably interest rate policy is better attuned to adjust.
What the interest rate policies did do very effectively is prevent inflationary expectations becoming compounded into the national psyche because, as you've probably read before, that can become self-fulfilling. By being aggressive on interest rate policy, even if it didn't impact the headline levels, arguably what this did do is prevent that second and third order of inflation washing through into the economy. And that's why we're seeing the overall picture of inflation being reasonably good as of today.
What is likely to happen next?
In terms of the interest rate cycle and what happens next in the US, we've had other bits of information since the last video which are of interest, such as the minutes from the Federal Open Market Committee meeting in July. To paraphrase the conclusions there, which are obviously very much data dependent, there was a broad feeling that all else being equal, next time we meet, there will likely be an interest rate cut. And it was judged to be a nice dovish signal by the markets, another excuse to be positive in equity land.
But if you look at what's priced in to fixed income markets now, around about 100 basis points of interest rate cuts are priced in the US between now and the end of the year. And interestingly there are only three meetings to go. So, the implication is at one of those meetings there will be a 50 basis point cut, which is pretty significant, and one you'd only expect to see if central bankers felt they were behind the curve, on the way down. Let's wait and see what happens there. As always with our approach we are long-term, we try to look through the noise and find a signal. Not least because it was only at the start of August when people were interpreting data to be more hawkish and getting quite nervous. And you saw the commensurate market sell-off as a result. That's now long forgotten, and markets are back to where they were before then, which is why I think it's a great example of why we don't focus on the short-term noise, but think instead about the longer-term direction. The longer-term direction, as we've alluded to several times in this video, is that inflation is in a much better place than it was a year ago and economies remain in reasonable shape. Overall, it's a broadly constructive environment for risk assets, as long as you invest in them at a reasonable price level. That's it from me. Have a good weekend when you get there, and we'll see you next time.
KEY RISKS
Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested.
The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.
The Funds and Model Portfolios managed by the Multi-Asset Team may be exposed to the following risks:
Credit Risk: There is a risk that an investment will fail to make required payments and this may reduce the income paid to the fund, or its capital value. The creditworthiness of a bond issuer may also affect that bond's value. Bonds that produce a higher level of income usually also carry greater risk as such bond issuers may have difficulty in paying their debts. The value of a bond would be significantly affected if the issuer either refused to pay or was unable to pay; Counterparty Risk: The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss; Liquidity Risk: If underlying funds suspend or defer the payment of redemption proceeds, the Fund's ability to meet redemption requests may also be affected; Interest Rate Risk: Fluctuations in interest rates may affect the value of the Fund and your investment. Bonds are affected by changes in interest rates and their value and the income they generate can rise or fall as a result; Derivatives Risk: Some of the underlying funds may invest in derivatives, which can, in some circumstances, create wider fluctuations in their prices over time; Emerging Markets: The Fund may invest in less economically developed markets (emerging markets) which can involve greater risks than well developed economies; Currency Risk: The Fund invests in overseas markets and the value of the Fund may fall or rise as a result of changes in exchange rates. Index Tracking Risk: The performance of any passive funds used may not exactly track that of their Indices. Any performance shown in respect of the Model Portfolios are periodically restructured and/or rebalanced. Actual returns may vary from the model returns.
The risks detailed above are reflective of the full range of Funds managed by the Multi-Asset Team and not all of the risks listed are applicable to each individual Fund. For the risks associated with an individual Fund, please refer to its Key Investor Information Document (KIID)/PRIIP KID.
DISCLAIMER
This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.
This should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust.
