The summer months are often said to be a quiet time for markets, an opinion I have never really shared. In fact, a review of financial market history shows that August tends to be one of the months of the year that moves the most. Considering the amount of news across companies, markets, and politics at the moment, I suspect that this summer will be no different.
My attention was drawn to an extremely interesting article this week by former New York Federal Reserve (Fed) Governor Bill Dudley. Since his retirement from being one of the most powerful central bankers in the world, he has been noticeably critical of his former colleagues. He famously called out the Fed for being too slow to raise interest rates in light of the extremely high inflation in 2022. More recently he has been an advocate of keeping interest rates higher for longer to prevent a re-acceleration of inflation. In a new opinion piece titled “I have changed my mind”, he has argued that the facts have changed and there is now a material moderating of economic growth that would warrant the Fed to start cutting interest rates as soon as next week. Although the market sees a sudden cut in interest rates as unlikely, this further reinforces confidence that September is going to be the month where the global interest rate cutting cycle really begins in earnest.
There will come a time when US Politics will return to more of a passing interest, but for now it continues to be front page news around the world and a major driver of financial markets. With the official announcement that President Joe Biden has withdrawn from the election just weeks before the Democratic Party National Convention, it is now most likely that Vice President Kamala Harris will be going head-to-head with Donald Trump in November. In one sense, this does not change the overall outlook, as Harris shares a similarly low approval rating to Biden. Polls and political prediction markets seem to share this view, with Trump still holding a commanding lead to regain the White House, although slightly less than before Biden had officially withdrawn.
On the surface it might seem that the change of candidates would have less of an impact on actual policies should Harris be elected, as she has been part of the Administration since 2020 and shares a similar political outlook to Biden. However, this might not be as clear cut as it looks. In a recent call our Investment Team had with political analysts based in Washington DC, it was pointed out that as a Senator, her record was somewhat more liberal. She partnered with hard left-wing politicians like Bernie Sanders and Elizabeth Warren on issues around regulation and antitrust policies. As we look forward, this may have a significant impact on investors outlook on banks and big tech companies that enjoy such monopolistic market share in their respective industries.
On that theme, we had an unfortunate but important reminder of the power and importance that large tech companies have over our daily lives when global travel and payment systems were brought to a standstill by the IT company Crowdstrike last week. A routine but faulty software update was implemented automatically, leading to millions of computers around the world crashing with the infamous “blue screen of death”. Unconfirmed reports are that Crowdstrike has been sending $10 vouchers to its customers as an apology. Investors seem to be more realistic about the true costs of this failure, wiping tens of billions from the market value of this company. Beyond the financial costs, thousands of travellers and families were unable to enjoy much anticipated holidays because of this catastrophic error from a supposed superstar tech company. This latest example serves as a warning of over reliance on large tech companies, a warning which might also extend to some investor's portfolios over the last six months.
For some time we have been concerned that equity markets in the US, like the S&P 500 index, have been extremely reliant on these tech companies for almost all of their returns. The financial term for this is “concentration risk”. With extreme increases in share prices in such a short space of time, too much of what is supposed to be a broad and diversified market index becomes overly exposed to just a few large companies. This could be a larger issue when these companies are on expensive valuations and expectations for earnings growth are sky high. An encouraging sign is that corporate earnings for many of the more reasonably valued companies outside of the concentrated tech sector are now starting to show meaningful growth. We will be monitoring this closely over the coming days and weeks as corporate earnings reporting season starts to get into full swing.
So, as I began, this is hardly a quiet summer. We very much have our finger on the pulse of the most important factors that are driving the investment returns in your portfolios. I trust this gives you the confidence to enjoy a well-earned break with your friends, family and loved ones this summer, weather allowing of course, and with that, do have a good weekend.
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