Given the vagaries seen in the second quarter of the year, it wasn’t unreasonable to fear what the summer months may deliver amidst the seasonally low liquidity and price volatility associated with the holiday period. In the event, there was nothing to see as stockmarket indices largely continued to make strong progress, albeit with a very limited number of industrial sectors contributing to performance. Indeed, with 500 companies making up America’s all-conquering S&P 500 index, just 2% of these constituents now account for almost 40% of its value.
Current US politics, economic policy and foreign policy tend to divide but it’s hard to argue there is a more innovative country in the world driven largely by their attitude to entrepreneurship. Combine this with the depth of their financial markets, attitudes to risk and loose employment laws and you have a unique combination, hence the ‘exceptionalism’ that that has been associated with America in recent years. Contrast this with the Chinese government’s strong state control of the economy or Europe, where restrictive laws, corporate lobbyists and powerful trade unions protect incumbents from innovative competitors. In summary, America innovates; China imitates, and Europe regulates.
Looking back over the last four decades, Western governments of most political shades would be thought of as being fiscally prudent by today's standards. Since the pandemic, and its associated lockdowns, governments have continued to spend extraordinary levels of money that they simply don't possess. According to the World Bank, Europe makes up just 10% of the world's population and 30% of its economy, yet it accounts for an astonishing 58% of global social protection spending. The seeds for the largesse we are seeing today were sown in the wake of the ‘peace dividend’ that followed the end of the Cold War. With the US seemingly protecting the West, European countries reduced defence spending to free up money to spend on more socially beneficial areas such as welfare and social care in a period of near zero interest rates. This all changed in 2022, so inflation was accompanied by extraordinary interest rate rises with the increased cost of servicing government debt, which must surely be addressed.
As we move into the fourth quarter, many of the issues which characterised the start of the year remain, with the impact of Trump's tariffs yet to be properly felt and interest rate cuts being stymied by sticky inflation. Record government debts and already high taxes leave authorities around the world with only the interest rate cutting lever at their disposal and, with weakening employment data, in spite of this sticky inflation we are likely to see further interest rate cuts which should support markets into the New Year.
The value of securities and the income from them can fall as well as rise. Past performance should not be seen as an indicator of future returns. All views expressed are those of the author and should not be considered a recommendation or solicitation to buy or sell any products or securities.
