November in brief: three themes driving US financial markets

What a difference a month can make in financial markets. We have the US election result now, so it would be strange not to comment on market moves at the start of November before reviewing October in full.

So far the US financial markets’ response to the news of Donald Trump as their President has been very positive. The S&P 500 Index rose 2.5% on the day of the result, and the Russell 2000 Index, the US smaller companies index, rose by more than 6%. There are three potential benefits to US companies which explain this market reaction; government spending, deregulation and lower taxes. Trump has made it clear that the likes of Elon Musk will be part of his team, and if Elon repeats some aggressive slimming down tactics he displayed at X (previously Twitter), the US civil service could well be in the firing line. Changes to spending and taxes are harder to implement quickly, but the Republican control of the upper and lower houses means that changes could be a lot easier to carry off than in 2016 at the start of Trump’s first term. This could mean significant benefits to US companies large and small but may also lead to higher than previously expected inflation pressures.

We feel this has been noted by bond (or fixed income) markets that have moved in the opposite direction. Government bond prices have fallen while yields have risen – a clear reflection of a widening government debt burden and the risk of a ramping up in Republican spending. A note of caution in terms of the fixed income market moves in recent weeks which have reflected growth and inflation: there have been a number of times in recent years when bond yields moved quickly (upwards) and the price of company shares (equities) struggled to increase significantly in the following weeks.

October: Japan and US strengths, the UK Budget, emerging markets and gold

In the month of October there was only one equity region that experienced positive returns in local currency: Japan. The strengthening of the Dollar and weakening of the Yen provided a boost once again to Japanese companies. Japan has a significant number of global manufacturers within technology, automotives and industrial sectors selling goods to the US. Whilst a weakening currency has benefitted the pricing of Japanese goods in the US, the strength of economic data from the US has been a major factor in driving the equity market moves. Positive signals have been clear; inflation has been trending down, albeit above the central bank targets, retail sales have proved positive despite the impacts of hurricane activity that should have slowed momentum, while new home sales continue to signal consumers’ appetite to borrow. It was of course these economic data points have that led to government bond yields, the rate the government pays to borrow over various time horizons, rising to a similar degree as we’ve seen in the UK. This saw the S&P 500 Index in local currency terms down -0.9% during the month. The US equity market is the largest proportion of our equity allocation, so this benefitted the portfolios.

Whilst the US and Japan stock markets provided good news for investors, the UK market struggled on the back of the Autumn Budget. The FTSE 100 Index fell -1.5% and the FTSE 250 Index was down -2.9% over the month, with UK government bond yields rising significantly. Increased spending has been met by higher taxation for UK companies, specifically through national insurance and the minimum wage. The Budget provided more uncertainty on the debt profile for the UK government and less certainty on economic growth. The Office for Budget Responsibility (OBR) and the Office for National Statistics (ONS) predicted lower economic growth and inflation in coming years. These are of course forecasts and are never that accurate. When looking at the recent economic backdrop it’s been clear the UK consumer has been very resilient, like its US counterpart. We continue to see the UK in a more favourable light even on the back of this Budget, as attractive valuations, share buybacks – repurchases reducing the number of shares in the market, and positive US growth support company earnings. FTSE 100 companies receive over 50% of earnings from the US, so the US economic backdrop remains positive for UK companies.

Emerging market equities fell slightly during the month, lagging other markets. The strength of the Dollar means rising costs of dollar-denominated debt in developing countries. The FTSE China Index also fell (-1.5%) in sterling following incredible increases in the previous month. Investors hoped the National People’s Congress meeting this month to decide further stimulus, alongside the expected rate cuts, would be more positive.

Whilst regional equities and government bonds fell during the month, it was gold that saw a sustained increase in prices – it rallied +8.3% in sterling terms, reflecting the risk to inflation in the US, as well as a sign that investors are acting with caution in an environment of political change. While risk is evident there also remains opportunity, and our investment committee met to review positions within the portfolios that have increased in value, as well as discuss opportunities for the fourth quarter. We will update you soon on the changes.

What a difference a month can make in financial markets.