Report on Q4 2017

Report on Q4 2017

4 Jan 2018

For the third successive quarter, the markets were mysteriously calm. Long term government bond yields barely stirred again. Bunds yielded 0.44% in September and they yield 0.44% today. The range, if that word applies, of gilts has been almost as tight. The UK stock markets slow-marched upwards in step in Q4: FTSE 100 +4.4%, FTSE 250 +4.5%, FTSE All Share +4.4%. It would seem that behind the blizzard of infantile stories about Bitcoin and Brexit, there were no events of substance. 

The US has been much more exciting. The Dow Jones Industrial Average rose by 24% last year and by 10% in Q4 alone. Almost all the reporting in the UK mocks Donald Trump and strains to suggest that he is incompetent and dangerous. Given that Trump campaigned on the basis that “good people don’t go into government” it is, to put it mildly, understandable that many people are keen, not to say desperate, to see him fail.

It may turn out to be the only major legislation that he ever delivers but the tax reform is certainly a thing and the stock market seems to like it. Cutting the corporate tax rate from 35% to 21% is clearly beneficial for business and has been naturally portrayed as Trump helping out his true personal constituency but it is interesting that the balancing reduction of allowances is causing some huge short term hits in reported earnings ($5 billion for Goldman Sachs alone).   

As soon as the bill was passed a raft of companies announced immediate $1000 cash bonuses for every employee. This looked suspiciously coordinated but I don’t suppose the 200,000 AT&T or 100,000 Comcast recipients mind. And the US consumer has been in celebratory mood with spending over the holiday period up by around 5%.

The overall effect of the tax cuts has been reported as if they are a straight transfer of money from the poor to the rich. This is a question of whether you think that the lower taxes will promote economic growth (the classical capitalist view) or whether you think that they will merely drain government coffers (a more left wing attitude of course). The undeniable fact that individual tax payers will pay lower rates has been criticised as temporary because it only lasts for eight years. This strikes me as a point that could only be made by someone deaf to good news. The only thing we can say with confidence about 2025 is that Donald Trump will not be President.

Trump’s foreign diplomacy veers between volatile and non-existent but we would be fooling ourselves if we denied that it might play well at home. By suggesting that foreign aid should be contingent upon the behaviour of the governments on which it is bestowed he is addressing an issue that most ignore. I wrote about this back in 2014.

I saw a CNBC talking head the other day saying that he was worried that investors aren’t bullish enough about the US stock market. Would that all our concerns were of that nature. This may prove to be hubristic talk but it seems quite probable that the strength of the US economy will be one of the stories of early 2018. This should have positive effects for the world in general.

Perhaps this will be the event that ends the bull market in US Treasury bonds (and other government bonds, eventually). Accelerating economic growth is supposed to drive interest rates higher. Since December the 10 year treasury yield has risen a little, from 2.40% to 2.47%. If it heads towards 3.00% we will have a reason to think that something more significant is up. And the markets will become less calm and more interesting.

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