Investment Newsletter November 2016
Optimism trumps pessimism? After the Brexit vote we saw some pretty strange market movements. Initially, UK stocks fell very sharply after the result was known. However, the market then quickly came to terms with the new developments and focused on the positives, such as the fall in the pound boosting profits of a number of UK companies.
Mike Deverell Investment Manager
However, that sharp change of direction is nothing compared to what we saw after the US election result. On the news that Donald Trump was to be the next president, US stockmarket futures fell so sharply that they hit a “circuit breaker” and trading was halted. At that point the futures were implying that the S&P 500 would fall more than 5% when the market opened. In the end, the S&P 500 actually went up 1.5% on the day. The US markets very quickly decided to focus
on the positives. In particular, Trump has pledged to lower corporate taxes which would boost company profits. He also plans to sharply increase infrastructure spending markedly, which could boost economic growth. Given the potential increase in growth, investors also decided this would lead to increased inflation. As a result, they are now certain that the Federal Reserve will put rates up, and this had led to bonds being sold off. We have noted in these newsletters before that bonds and equities had become increasingly correlated. Over the long term, these assets should typically move in different directions. Traditionally, the so-called “safe haven” government bonds such as gilts or US Treasuries do well when the economy is doing poorly and investors are nervous about investing in equities.
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