Watching and Waiting Both Sides of the Pond

For past 3 months US equity markets have essentially traded in a largely sideways fashion

inside a roughly 7% range. Since falling back to their lowest point during this period at the

beginning of August the S+P 500 has rallied again, back close to the all time high set in July

at 3028. That rebound saw two more attempts to set a fresh high in September both fail.

This led to another relapse, back to as low as 2860 at the beginning of October.

The subsequent rebound over the past couple of weeks has led the price back as high as

3014 earlier this week on 22/10. Leaving aside the raw price of the index for one minute

let’s have a look at the more detailed numbers. Since august 2015 the dividend yield on the

S+P has been in a broad range in between 1.7% and 2.25% as judged by each monthly

average over that period. More recently, over the past 6 months that dividend yield has

averaged around 1.9%. Meanwhile the current p/e ratio is close to 20. This is quite a high

valuation multiple by historic standards and may explain why the index continues to

struggle to make fresh highs.

Be that as it may, there can be little doubt that a steady dividend yield of close to 2% still

seems attractive to US investors. Let’s not forget that tens of millions of US citizens pile

chunks of their salary into their 401ks’ each month- a good proportion of which finds its way

into S+P stocks one way or another. This has been the case for many years and also explains

why the US stock markets have been so resilient over the past decade, since the financial


This is why when you listen to the rhetoric from the US president and his fixation with the

stock market you get a better understanding of why he, in particular seems so sensitive to

how the market performs. Trump knows that if the stock market trend turns lower, then

voters will not thank him one bit. Its arguable therefore that Trump’s fortunes in the 2020

elections might be well gauged by using the level of the equity markets as a good barometer for his likely chances of re-election.

This in part explains his determination in continuing his attacks on the Fed, demanding that

they lower rates further and faster. Trump sees the Fed’s monetary policy path as not only

keeping the dollar artificially high, but also hampering the stock markets from further gains-

gains that in Trump’s world equate to increasing his chances of another 4year stint in the

White House. So, that’s all pretty straight forward and easily understood right?

Well, it would seem so and furthermore, such is his sensitivity to stocks that it might also

explain why he more recently dialled back quite markedly in his rhetoric with the Chinese on

trade. Whilst it looks like a deal-or at least part one of a deal- might be reached next month,

it is not entirely in Trump’s gift to make that happen. The markets know this too, especially

with the Chinese history of agreeing to a deal in principle, only to walk back from it when it

comes to signing on the dotted line. This is surely why the markets seem to have stalled at

the top of the range again and are now in wait and see mode?

Trump is due to meet with Xi at the APEC meeting in Chile on 16/17 th November. According to Trump that is when the first phase of this new trade agreement is likely to be signed with President Xi. Ahead of that next week there is also the prospect that Powell and his colleagues may yet do the US president another favour by lowering rates again. However,

that is not what is currently anticipated. Nevertheless, if the Fed does cut again, then it

could be good news for Trump. Traditionally, US equity markets fare quite well in the run up

to Christmas. Apart from anything else that is often because they have been beaten back

during October (some years almost terminally). Well, this year that simply hasn’t happened

and with just week to go before the month is over, that looks increasingly unlikely too?

Notwithstanding that, the markets are still not taking anything for granted it seems and

certainly not ignoring the potential for the unexpected to show up from the blind slide.

Assuming that doesn’t happen and all goes well in Chile and Trump doesn’t get impeached

by his own senators, then maybe the balls might fall just right for the US president in the

coming weeks. Meanwhile, over here in Blighty we’re all still watching and waiting too-yet

another extension- How long for this time? Waiting for Godot about sums it up I think!

Anyway, today is the end of an era as Mario Draghi presides over his final policy meeting

after 8 years at the helm of the ECB. Nothing is expected to change on the policy front today and it would be a real surprise if Draghi were to make any changes on what is probably his final full day. I suspect he’s probably more interested in what’s on the menu tonight rather

than leaving his successor with even even less tools in the box!

Important economic releases and events due this week

24/10- 12.45pm Eurozone ECB Monetary Policy Decision

(Consensus- No Changes Expected)

24/10- 1.30pm Post ECB Policy Decision Press Conference

24/10- 1.30pm US September Durable Goods Orders

24/10- 2.45pm US October Manufacturing PMI

25/10- 9.00am German October IFO Business Climate Index