US equity markets have passed the point which signified the longest bull run since the Second World War, writes Jim Power.
Somewhat surprisingly, this landmark event was not greeted with too much euphoria, as there is a lot of nervousness out there that is tending to dampen spirits rather than fuel animal spirits.
However, for those of us who warned at the beginning of this year and probably at the beginning of last year, if my memory serves me correctly, of tougher times ahead for equity investors, the markets have performed remarkably well in the circumstances.
On the geopolitical front, there is still a lot going on. Emerging markets of significance such as Turkey, Venezuela, Argentina, and now South Africa are going through difficult times that clearly highlight the risks of poor policymaking and an over-reliance on foreign capital.
The UK’s Brexit drama is showing no signs of working out well, unless one is a rampant Brexiteer. Indeed, as a topic of popular discussion, it has gone off the boil and the news agenda to some extent. That’s because most people have no clue how to interpret political events, never mind predict the likely outcomes. October looms and the formal exit date in March next is not too far away. For such a momentous event to be so close is scary.
In the US, President Donald Trump renegotiated the Nafta trade deal to some extent, which has helped market sentiment. However, his protectionist agenda continues to worry everyone.
On the economic front, the news continues to be pretty good and supportive of markets. The US is growing at a healthy pace, the UK is doing Okay, in the circumstances, and the eurozone is holding up pretty well. The biggest boon for equity markets is the earnings performance, particularly of a few big tech stocks.
What is probably most puzzling is the fact that despite a US unemployment rate of 3.9%, wage pressures in the US are still very subdued.
When visiting the US in recent years, I have been consistently taken aback by the precarious nature of employment. Despite a very buoyant labour market, many US workers are not feeling or are not displaying the joy and optimism of their forebears.
The failure of such low unemployment to feed through to higher wage inflation was a topic of much debate at the recent annual meeting of central bankers in Jackson Hole in Wyoming.
Eminent economists put forward the following reasons: The diminished bargaining power of non-unionised workers; employers colluding to keep wages down; the growing dominance of large tech companies; and the growing disparity between powerful companies and the rest.
Strong economic growth and low unemployment are not boosting wage costs and this is translating into strong growth in corporate profits: Equity markets like this, but large segments of US society may not share the joy.
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