Market View November 2017

Andrew Milligan

In this month’s market view I consider the 30th anniversary of Black Monday and what we can learn from various market disasters over the years. I also reflect on the first UK rate increase in 10 years, the on-going effects of the Brexit vote and if President Trump is finally making some headway with tax cuts in the US.

Could Black Monday happen again?

This October past marked the 30th anniversary of Black Monday, the famous market crash in 1987, which gives rise to the question – could it happen again?

One can never say ‘never’. However, the key fact is financial markets today are very different from 1987. There are different rules and regulations, and many more types and ways of investing alongside the main markets that we’re all familiar with.

So, our thinking is that large market falls in a single day or a few days, as seen 30 years ago, are much less likely nowadays.

Of course, investors still have to accept that day to day, week to week, there can and will be volatility in markets. New news does have an effect!

October superstitions – are they warranted?

Historically October hasn’t been a good month for markets. There’s a famous line in Mark Twain’s ‘Pudd’nhead Wilson’ that goes like this:

“October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.”

It’s true that some nasty stock market crashes have happened in the autumn, for example there was the Great Depression of 1929, followed by Black Monday in 1987 and, more recently, the global financial crisis of 2008.

There’s evidence of seasonality in investing.

And there’s evidence of seasonality in investing. In some years ‘Sell in May and go away, and come on back on St. Leger’s Day’ (which is in September) definitely works as an investment approach.

The difficulty is that these phenomena aren’t apparent every year and, after the cost of buying and selling stocks is taken into account, there’s little evidence that it’s a consistently profitable exercise.

At Standard Life Investments, we prefer to focus on economic and company fundamentals, our analysis of politics and where investors’ money is going, and a good understanding of government policy and how markets value businesses.

At present we remain solidly invested in global equities, partly because markets are starting to look forward to possible tax cuts in the US, which could boost profits.

Headway at last for US tax cuts?

The main need for the Republican Party, and the Trump Presidency in particular, is to make sure they have some form of legislative success before the mid-term elections in autumn 2019.

After all healthcare reform, the proposed wall between the US and Mexico, trade and migration matters have all become more complicated in recent months.

Although there won’t be major tax reforms as the money isn’t there to finance anything too aggressive, it’s clear that Washington is trying very hard to pass some form of tax cuts by next spring.

But there are still many hurdles to cross; with many competing factions in Congress, an early resolution would be a surprise.

On that note, stock markets have not yet fully priced in any major tax cuts.

That’s one of the reasons why we’re positive on US equities.

Strong America, weak UK?

While the US economy is steadily moving ahead, in the UK economic growth has definitely slowed in 2017. The UK is probably expanding about 1.5% a year at the moment – that’s some 0.5-1.0% below previous levels.

This is due to a combination of factors, including the plunge in sterling after the Brexit vote.

This did support exports but also boosted inflation for imported goods, which in turn has squeezed consumer incomes. Other factors include the Bank of England’s efforts to restrain rising levels of consumer debt, encouraging banks to lend more cautiously.

On top of that, Brexit uncertainty does appear to be affecting business confidence and consequently capital spending. As such, we expect the UK to be a slow growing economy for some time to come.

First rate rise in the UK for 10 years

With inflation reaching a five-year high, the Bank of England’s Monetary Policy Committee has finally increased interest rates by 0.25% to 0.5%.

Bank of England increased interest rates by 0.25% to 0.5%

The key issue for the markets will be how far and how often the Bank will go with further increases in 2018.

There are many differing views on this, with inflation, sterling, the impact of Brexit on confidence, the boost from global trade and potential changes to taxation in the Budget just some of the factors.

All in all, we expect another increase by the Bank in 2018, perhaps again in 2019, but it’s very data dependent. We do believe the Bank will wish to move slowly given the large debt burden facing some parts of the country.

November Budget – what can we expect?

There’s always a lot of speculation in the run-up to any Budget, and this one is no different. It must be remembered that although the government’s borrowing requirement is better than previously expected by the Chancellor, the UK is still borrowing a large amount each year, much from overseas investors attracted by the high yields on UK government bonds (gilts) compared with overseas markets.

In addition, the pressure on the government to spend more money on the NHS, defence, housing and so forth is stronger than ever. At the margin the Chancellor has to give his party some good news. How to pay for this? It is no surprise that there are rumours that we’ll see some form of change to pensions or allowances again.


The information in this blog should not be regarded as financial advice. Please remember that the value of your investment can go down as well as up, and may be worth less than you paid in. Information is based on our understanding in November 2017.