James Bond fans might just remember the Rita Coolidge song “All time high” released in 1983. Ms Coolidge, presumably referring to yet another Bond romance, observes at the “all time high, we’ll change all that’s gone before.” Turns out she is wrong.
The United States share market hit an all-time high at the end of April. May was not the celebration contemplated in the Bond theme song, with “all that’s gone before” in fact not changing at all. Instead recent history rushed back to the forefront, with markets down heavily for the month.
The red ink flowed. The US share market fell 6.6% for the month, Europe dropped 6.7% and the Chinese share market collapsed 7.2%. Bond markets were the mirror image of this with interest rates falling 0.4% to a low of 2.1% for the US ten year treasury, as an example, leading to capital gains for fixed income investors.
It was the same one, two punch – trade and slowing economic momentum – that impacted the market in the fourth quarter of 2018 that reappeared in May.
We used a series of T’s to describe the trade war when it first erupted with Trump, Trade and Tantrums the favoured alliteration. In the first quarter of this year it had looked like tensions were calming down and the market celebrated this rallying strongly. But tempers have again become frayed. The Huawei ban, increased tariffs and tit for tat policy announcements have been dominant themes in this month’s headlines.
The challenge for investors with the trade war is the wide range of possible outcomes as it unfolds. A scary end game is possible if it continues. Economists are mixed on the impact of this but point to a reduction in US GDP in the order of 0.8% to 1.6% if both Chinese and Mexican trade relationships continue to sour. Of course, all of this could be over in a handshake deal if President Trump is in the right mood. Markets hate this uncertainty.
At the same time the global economy is slowing of its own volition. We have written about this previously. The US economy had benefitted from tax cuts in 2018 but the effect of these is wearing off.
We had expected a slow down to occur in 2019. This is clearly happening with lead indicators of growth, like the ISM manufacturing index, clearly off its highs. A similar slowdown is evident in Europe and China, albeit China had been stablising before the latest blow up in tariffs.
Like uncertainty, markets don’t enjoy slower economic growth. Little wonder May was a tough month.
In multi-asset portfolios, like KiwiSaver, we are positioned in expectation of weaker markets, owning less in shares than is typical. That took some of the gloss off returns for the first three months of the year but we felt it was a prudent approach. This view was vindicated in May and at least mitigated some of the worst of a tough market. We continue to believe caution is warranted.
Going back to our Bond analogy we are hopeful that unlike Bond’s classic martini this market volatility ends up as just a minor stir rather than the more violent shaking he prefers. Unfortunately, right now both are still very real possibilities.