Just like the ribbon tied to a piece of rope and pulled by strongly competing forces, financial markets have shifted this way and that over April, but to nothing like the exaggerated degree witnessed over the first quarter of the year. Indeed, the UK stock and gilt-edged markets have displayed commendable resilience through a series of risk events and sometimes severe headwinds. The UK economy has matched that of other developed economies elsewhere, steadfastly refusing to wilt despite the twin pressures of stubbornly high inflation and eleven consecutive rounds of higher interest rates. The pound, too, has stabilised on the foreign exchanges as global investors have responded favourably to improved economic stewardship after a volatile autumn.
Thus, it is still too early to say that the pressure on activity, and by extension the financial markets, has eased.
As April came to an end, the world’s most important central banks took the decision to reverse the provision of highly market-supportive emergency liquidity, thought necessary to provide stability in the wake of March’s banking sector turmoil, from daily back to weekly operations. In so doing, they have sent a clear signal that despite lingering fragility, especially in the US regional banking sector, the worst of the episode has been navigated successfully. However, it is the banking sector that serves as the interface between central bank monetary policy and the real economy and the lingering consequence of events over March is thought likely to be a further tightening in credit availability. Thus, it is still too early to say that the pressure on activity, and by extension the financial markets, has eased.
On the other end of the rope, persistent inflationary pressures are serving to maintain the tension. Driven in no small measure by food prices at their highest level since 1977 and showing few signs of abating, the UK’s inflation experience is proving more sustained than elsewhere, including in both Europe and the United States despite steadily receding energy prices after last year’s spike in the immediate aftermath of Russia’s invasion of Ukraine.
Why it should be that UK inflation is proving so much more enduring is the subject of much conjecture. One justification might lie in the post-pandemic jump in wholesale energy prices, exaggerated by the fallout from the war in Ukraine which was far more apparent in the UK and Europe than in the US. Beyond that, some European governments were quicker to cap prices than the UK. The regulator’s price mechanism is serving to ensure that energy prices are now falling more slowly at home than elsewhere. Another justification might lie in the stickiness of the Bank of England’s closely watched underlying price pressures, the consequence of stronger wage growth and a more persistent shortfall in the supply of labour than seen across other developed economies. Despite the confidence that these price pressures will gradually abate, the Bank of England has surely got more work to do if its aspirational medium-term 2% target is to be achieved and if that means forcing a recession then, think interest rate-setters, so be it.
Broadly diversified investment portfolios do not, of course, exist cocooned in a domestic vacuum and events in the wider world matter to just as great an extent as those at home. Beyond lingering concerns regarding the health of the banking sector, the United States has plunged once again into a debt ceiling crisis. We have been here before of course and financial markets have dusted off the “playbook” last used a decade ago. So severe would the consequences of a US default be, even if technical, that some form of 11th-hour compromise is still the most likely outcome. But markets are not complacent given the highly adversarial nature of US politics, a fact reflected in a notable adjustment in short-dated Treasury bill pricing.
Not to be overlooked, geopolitical events are moving at warp speed. A Chinese economic rebound, the inevitable consequence of the lifting of highly restrictive “zero Covid” policies, has emboldened Beijing increasingly to confront the United States and its allies both militarily in Taiwanese waters and economically, a confrontation to which the West has responded robustly. Financial markets have historically struggled to price geopolitical developments, but when those developments enter the economic sphere and the world appears on the brink of a profound fracturing, these issues are harder to ignore. The cleaving of the world into two distinct economic blocks would pose a new set of challenges and add a new dimension to financial asset pricing.
Financial markets inhabit the future as much as they are informed by the present.
Yet for all these pressures financial markets have proved resilient. That this resilience will be challenged is an inevitable feature of the landscape and calibrating risk is just as a significant part of the investment process as assessing future rewards. Financial markets inhabit the future as much as they are informed by the present. Whilst the immediate outlook is opaque, the combination of slower growth and ebbing inflation should result in lower interest rates in time, a fact not lost on the bond market. Meanwhile, history confirms that whilst corporate profit and loss will likely reflect tough operating conditions in the near term, it recovers fast once the bottom has been reached. It is thus understandable that whilst the result of this show of strength contest is hard to predict, investors are right to hold the line.
The information contained in this article is for general consideration only and any opinion or forecast reflects the judgment of the Research Department of Raymond James & Associates, Inc. as at the date of issue and is subject to change without notice. Past performance is not a reliable indicator of future results.
You should not take, or refrain from taking, action based on its content and no part of this article should be relied upon or construed as any form of advice or personal recommendation. The research and analysis in this article have been procured, and may have been acted upon, by Raymond James and connected companies for their own purposes, and the results are being made available to you on this understanding.
Neither Raymond James nor any connected company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon such research and analysis. If you are unsure or need clarity upon any of the information covered in this article, please contact your wealth manager.
Black MondayOn 19 October 1987, the stock markets experienced a dramatic plunge that prompted many firms to shut down their trading desks and turn off their phones to minimize internal losses. Raymond James refused to do the same. Our desks stayed open to help meet clients’ needs, resulting in our first and only unprofitable quarter since the firm went public in 1983. |
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Who was Raymond James?The Raymond in our name is actually from Edward Raymond, owner of a 15-employee mutual fund sales group, Raymond and Associates, along Florida’s west coast. He sold his company to Bob James on 15 July 1964, on condition that the surviving firm be called Raymond, James & Associates. Three days after the sale, Ed Raymond was involved in a near-fatal automobile accident and never joined the firm. Nonetheless, even after Raymond had passed away, Bob James insisted that his name remain on the door – ahead of James’ own. That was a promise he made to Ed Raymond three days before the accident, and Bob James was a man who kept his promises. |
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Bear Market of 1974The severe bear market of 1974 threatened the existence of Raymond James, which was bleeding capital by the day. Tom James, his father and other leaders took extreme measures to keep the firm afloat, slashing costs, foregoing paychecks and even attempting to sell the firm for just enough capital to protect client assets and retain as many associates as possible. The story could have ended very differently if not for a sharp upturn and continued rebound in the stock markets late in the year. |
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Taking Raymond James PublicWhen consideration was being given to taking Raymond James public, Tom James penned a letter to shareholders (largely employees at the time). ” … the public offering should be considered as a statement of our independence. While this is a psychological rather than an economic rationale, it is nonetheless very important. We have asserted for some time that we are not interested in becoming a small part of a very large corporation. That assertion results mainly from the inclinations of management rather than the economic benefits associated with either alternative. The public stock offering affords us the opportunity to enjoy a little bit of the best of both worlds. While shareholders will be given liquidity at fair market value, we will still have the ability to control our own destiny.” After 40+ years of Tom’s leadership, upon becoming CEO, Paul Reilly was often questioned about whether the company might ultimately surrender its cherished independence and be acquired by some larger entity. His response: “Not while I’m around.” It’s a theme that continues today. |
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