For UK based investors the important news was another cut in interest rates, though it didn’t boost UK equities. China was best over the week, but it was a modest gain, slightly above 1%, with tech-focused NASDAQ and German DAX just under 1%. Only India was down a little over 1%, though you might have expected bigger falls on the latest hefty tariff news. Commodities made very good progress across a broad front, with oil and platinum being the only obvious exceptions, down 5% and 7% respectively.
A quick aside, gold has broken upwards clean through resistance in the last 24 hours, partly due to the US imposing a 39% tariff on imported Swiss gold, a strange one. Might this be the beginning of capital controls? More next time as this breaking story unfolds, but right now this seems very positive for gold.
Let’s look at the detail on everything other than gold.
As is often the case with investing, it’s better to travel than arrive. Buoyed by cheap valuations and expectations of rate cuts, the FTSE 100 is up 11% in the year to date, whereas the headline grabbing S&P 500 is only up 7%. The rate cut this week was a good excuse to take some UK profits. Although inflation may edge up again in September, there is more than enough slack in the economy to justify further cuts, if not the five cuts which some analysts predict by the end of 2026. In turn this can drive the UK stock markets higher, albeit after a bit of a breather.
China continued to edge ahead on little news. Xi probably believes that while Trump continues to dig a hole for himself he is best not interrupted. Trump tariffs have smashed India (now 50%) because they buy Russian oil, ignoring the fact that the amount imported by the EU is greater, and that the US imports $3 billion of Russian goods. Trump is on pause with China until next week, and another 90 days of reflection is then likely as they depend on Chinese rare earths – anything more aggressive would certainly unsettle markets.
The UK and Chinese markets should be able to make further progress in the month or two ahead, subject to the next irrational act by Trump. He continues to act like someone setting fire to their own house to stave off the cold. The US unemployment numbers were worse than expected, as were the re-stated numbers for the prior months, prompting Trump to instantly sack the head statistician. Shoot the messenger. Another nail in the coffin in which US credibility is being laid to rest.
Those unemployment numbers triggered another wave of research analysing the likelihood of a US recession. Some pitch the odds at 50%, most less than that. But don’t waste too much time on this stuff. Partly because the track record of economists predicting recessions is appalling, even when we are in one already! And partly because there is only one kind of recession which matters, and will sit alongside the scale of multi-year stock market downturn which we should fear most. We look at this here. There are two essentials. Vulnerability, we have that in spades. And a shock… we have had a few, but so far US financial markets have not yet been broken… confidence and complacency rules. On which note…
If anyone out there has a better guide than history to the very big moves ahead, do say. If not, history says falls of at least 50% in the US stock market are baked in. I won’t bore you again with the many precedents and the straightforward maths. But it is worth re-visiting one angle on the entrenched complacency which still dominates.
We like certainty, we like to believe, we warm to confident people, and we love stories. Best of all if a confident person tells you a story that you want to believe because it creates certainty. The story was the book “Stocks for the long run” by Jeremy Siegel. His timing was superb, being first published in 1994. Investors wanted to believe, we all wanted to believe. The 1980’s excitement, “this time next year we’ll be millionaires”, was rudely interrupted by the 1987 Crash and then the worst recession since the 1930s (at least in the UK).
The book was an amazing tonic for the nervous early Nineties. The thesis was that for nearly two centuries the stock market was by far and away the best source of long term wealth accumulation. Temporary downturns should be bought, and otherwise you should “buy and hold” or “buy and forget”. This worked brilliantly for the next 6 years, though not if you bought in 1998-2000, as did most retail investors, after which your tech funds were smashed by 80% falls in the following three years. Then you made no money in US stocks for the first decade of this century.
But let’s put those latter real world events to one side for a moment. More recent findings in research from Edward McQuarrie “substantially diverge” from the Siegel thesis, mostly because of incomplete or incorrect data by Jeremy. Once this fundamental wrinkle is ironed out, it is clear from the facts that there is no law that equities will outperform bonds. Similarly, there is no rule that the longer you hold on, the greater your outperformance. “No consistent relationship between outperformance and the length of the holding period”. That’s a real eye opener for me too.
The key across history is the regime within which equities and bonds and other financial assets co-exist. For example, as inflation and interest rates fell away from the highs of 1980, around 15%, it was great fuel for equities. Add in the random event of the crazy central banks experiment from 2009 (QE), the vast sums of cash thrown at economies as the pandemic took hold, and now the promise of AI… you have an evolving series of pillars for an extraordinary equity bull market. Without them, you don’t. The bull market is simply the accident of the regime in which you might have held equities.
Knowing the latter encourages a more sober approach to investing. Additional research from Morgan Stanley might make you go teetotal!
They considered a sample of 6,500 US stocks in the period 1985-2024. The average maximum fall was 85%, taking 2.5 years from peak to trough, and more than half of these stocks never recovered to their prior highs. For the top 25 funds of the last 25 years the falls was 60%.
I am now planning a calm week away from the office. The intention is that there will not be a note next Friday, unless Trump blows up the global economy and financial markets between now and then… not out of the question!