The US market has broken through 40 all-time highs over the past couple of years, and now we have a new acronym - ATH. James Klempster explains in this video why investors should not focus on this and discusses movements in equity and fixed income markets and the US earnings season.
Hello, it's Friday 25th October. I thought we'd pause for just a few moments and reflect on what's been going on in markets this week. A week or so ago I saw a new acronym, and we love acronyms and jargon in this game. 'ATH' – I don't know if you've seen it yet, but it stands for 'All-Time High'. And the context of course, is the US stock market in particular. It has run up over the course of 2022, knocking through more than 40 all-time highs on the way to its levels of last week. We've spoken about all-time highs before in these videos. The fact you've gone through an all-time high doesn't in and of itself presage something worse to come. Because you know, as a long-term wealth compounding mechanism, stock markets go through all-time highs on a sequential basis fairly regularly. But the fact that we've got so accustomed to it that we can't even be bothered to write it in its full form is quite an interesting dynamic really.
But overall, the US remains in pretty good shape. We've had a slight weakness over the course of this week. It's nitpicking really given how good the run has been, but a little pause for breath is not a bad thing. It can be pretty healthy and not unexpected if you think about what's going on behind the scenes, interest rate policy, concerns around geopolitics still and of course the impending US election. You can see why there are potential reasons why the stock market would take a little break every now and again. It's an inevitable point because markets don't go up in a straight line.
While the stock markets have been drifting sideways this week, there have been bigger moves in fixed income markets. And in fact, over the last few weeks really. The US 10-year yield is now sitting at 4 .2%, having been as low as 3.6 % within the last three months. The UK's 10-year yield is also sitting around about 4 .2%. Whereas in Europe, you've got Germany sat around about 2% for the 10-year yield and France's 10-year yield at around about 2.8%. And they haven't really moved much compared to the moves in the US over the last few months.
So, there are a number of different interesting features to unpack in fixed income land. And the first point is yield direction differentials. You've got some yields going up, others sitting still. You've got also higher nominal yields to that which we've become accustomed to. If you cast your mind back to before Covid, getting yields really in the low or even negative space, now we've got positive nominal yields around the world. And notably positive ones in the US and UK around that 4% number, but also positive real yields as well. You're getting returns in excess of inflation which is another interesting feature, and a long-term characteristic of sovereign bonds, something again we haven't necessarily seen in recent years. But it's a welcome return for that. If you think about the environment we're in where you've got divergence in terms of monetary policy, people are very much focusing on this localised inflation and economic challenges to set local policy. Plus, you've got reasonable yields, and it's a dynamic that makes fixed income markets interesting as long-term diversifiers. It also makes a strong case for active management to take advantage of these various differences that we're seeing in these markets.
Earnings season continues this week in the US with no big surprises to date. There has been some good news and on the whole, earnings coming in ahead of expectations so far. While we're still fairly early into earnings season, that's obviously very welcome. Asian markets are looking a little bit better this week, particularly China and Hong Kong which had a bit of a weak patch following a strong bump from the Chinese government's monetary and fiscal stimulus.
Elsewhere, we had the BRICS conference this week and it's quite interesting because we saw the introduction or speculation around a new currency, a new payment system trying to ‘de-dollarise’ the block. There was no immediate financial market impact from that, but I think it's an interesting reflection on the theme that we've spoken about several times in these videos. A move to a multi-polar world trying to de-influence or reduce the impact of the US dollar and Western payment systems.
Reducing reliance on those fits very neatly with this elevated geopolitical theme and multi-polarisation that we've referred to a number of times in these videos. And then that neatly brings us to the International Monetary Fund (IMF) and the World Economic Outlook that was published this week. There were no big surprises in there, it was essentially saying that the world is muddling through. Growth is okay. The main risks to growth are coming from interest rates and inflation and of course geopolitics is in the background as another potential risk factor to bear in mind. This is again consistent with the reports that we publish on a regular basis. So, the positive is that there is growth out there. We continue to see the green shoots of a recovery. Inflation is still coming down and once you reduce your focus on the minutiae of exactly when interest rates will be cut and what's likely in terms of interest rate policy, you can see there are actually some decent opportunities out there. It remains broadly constructive as far as we're concerned when we're thinking about building portfolios. That's it from me. Have a good weekend when you get there and we'll see you next time.
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