“Summer has come and passed"
- Green Day, Wake Me Up When September Ends
Many years ago, it was the custom of aristocrats, merchants and bankers to leave the City of London for the ‘hot’ Summer months, in preference for their country residences. It seems it’s interested parties noticed that the investment returns of the stock markets were less favourable during these Summer months. Thus sprang the proverb “Sell in May and go away, come back on St. Leger’s Day” - The St Leger’s Day Stakes being the final leg of the thoroughbred horse racing season ‘Triple Crown’ (After the 2000 Guineas and the Derby), which took place sometime in September.
More recently Wall Street has adopted (and adapted) the proverb – “Sell in May and go away, come back after Labor Day” – as historic measures of performance, it is proposed, suggest weaker returns over the Summer. However, the US Labor Day bank holiday is fast approaching – 6th September – and since the end of May the S&P is currently almost 7% higher! With sentiment very negative and positioning still likely underweight, this year’s return markets “...after Labor Day” could be a little more uncomfortable than others.
Indeed, we remain very much in the positive camp for the global economic backdrop – unlike many commentators who appear to have actively sought reasons to be fearful. For us the absolute level of economic activity remains buoyant, just as the world embarks on a multi-year recovery (albeit with intermittent setbacks from the aftershocks of the covid pandemic). The global economic recovery will remain differentiated, but as far as the US is concerned there is no point in the recovery where growth has been this strong or where financial conditions have been this easy. We still see significant, US led, upside for equities.
What is very interesting from a macroeconomic perspective is how the monetary impulse fits into the global growth differentiation story – particularly in conjunction with the (global?) inflation and (national) fiscal policy narratives.
In the US we continue to see the growth backdrop as warranting a gradual move towards the removal of accommodation – particularly given the low level of the long end of the US yield curve. The Federal Reserve’s narrative has indeed been suggestive of this over recent weeks, albeit with a sporadic ‘delta variant’ caveat.
US headline CPI appears to be stabilising over recent months – albeit at historically elevated levels – indeed there are some tentative signs of moderating price pressures globally. We continue to see inflation as transitory and a function of constrained supply and not excess demand. (Ex- Fed Chair Bernanke this week also stated that commodity prices won't add to inflation going forward). If this does become a wider theme and supply bottleneck resolutions reduce the (transitory) price pressure, then from our perspective this shifts attention back to the eurozone where the current European Central Bank projections see a significant (demand driven) shortfall in inflation at the forecast horizon. This is likely a key example of the prospect for monetary differentiation going forward.
Going back to the opening theme of Summer months and inactivity – it has indeed been a quiet week so far. However, there are two key events that likely shape the proceedings for US monetary policy over the next four weeks (either side of Labor Day). This week culminates with the seemingly long-awaited Jackson Hole Symposium (entitled “Macroeconomic Policy in an Uneven Economy”) where the markets will forensically examine the wording, emphasis and inference of Powell’s keynote address.
The second event is the September Federal Open Market Committee (FOMC) meeting that includes updated economic projections and ‘dots’. Both events will be closely watched for the formal announcement of the timing, pace and structure of the tapering of US asset purchases. (Central market expectation is, broadly, that it begins in November at a pace of $15B per month). There has been some recent wobbles in commentator expectations due to the recent Delta variant surge in some parts of the US, but as we saw from the Reserve Bank of New Zealand (RBNZ) and Bank of Korea (BoK) recently, the economic impact of successive waves of virus outbreaks is significantly reduced and in many respects it delays, rather than cancels economic activity (RBNZ) and at the same time the current level of accommodation risks financial instability through encouraging increased debt burdens (BoK).
Essentially, the point I am trying to make here is that we see the US economy as running hot enough, despite any near-term Delta variant concerns, to warrant a shift towards the removal of monetary accommodation. Over coming quarters, we see this progress having the potential to significantly widen the policy and rate differentials in favour of the US - particularly relative to Europe. Furthermore, we do not see the gradual policy normalisation as a negative for US equities (providing inflation remains transitory), indeed we continue to see significant upside as nominal revenue growth outpaces nominal rate growth.
In practice, come Labor Day, St Leger’s Day, or even September FOMC Day, we expect markets will have a stronger rationale to buy (USD and stocks) … when September ends.
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