Daily Commentary

MarketMinder’s View: This piece is quite political, and its slant is obvious from the headline. But we set this aside and encourage you to do the same, bearing in mind that markets prefer no party nor any politician or government, making preferences counterproductive from an investment standpoint. And we highlight this article because, counterintuitively, it illustrates this very point, showing plainly that both of the UK’s main political parties have implemented and presided over economic policies that eventually proved negative for the country’s economy and markets. No party has the monopoly on good or bad policy, making it vital for investors to look past personalities and ideology. Beyond that, we think the pithy, clear history of the UK’s devaluation—which had its 32-year anniversary Monday—is helpful. One, it is a simple explanation of currency pegs’ inherent instability. Two, it shows that theory and real-world outcomes don’t always match. And three, it demonstrates that even seemingly catastrophic events in the moment can turn out to set the stage for very good times ahead. In this case, pegging the pound to the deutschmark seemed wise to UK financial officials given Germany’s long-running financial stability and its role as the backbone of the eurozone’s future currency. But in the short term, it resulted in the UK having to follow German monetary policy—problematic when Germany needed to hike rates to battle reunification-driven inflation, while the UK needed cuts to stave off a double-dip recession. Leaving the peg—an outcome that was always in the offing but accelerated by speculators—caused a very short-term disruption but paid off in the long run. “To cut a long story short – and the markets were going short of the pound – the belief that the UK could not maintain an overvalued currency became overwhelming, and speculation forced the pound out of the ERM. This eased our economy’s competitive position, and economic recovery became sustainable.” Stocks enjoyed a marvelous decade, too.

MarketMinder’s View: In a weird way, this article is very much a breath of fresh air. For a while now, article after article has argued rate cuts are a magic elixir for stocks and necessary to keep this bull market marching onward. It gave us the heebie jeebies, if only a little bit, because rate cuts aren’t inherently bullish and have accompanied some bad times for stocks. The seemingly universal enthusiasm appeared unwarranted, potentially suggesting expectations risked creeping away from reality. This piece is therefore a welcome antidote, pointing out that reality is a lot more complicated. While people like lower rates and view them as bullish—cheaper lending!—the Fed often cuts because creeping trouble has become obvious, and it is trying to play catch up and stave off a recession. The midcycle, bullish, just-because-we-can cut is a rarer beast. “Some history: The Fed began lowering rates in September 2007, in the early stages of a financial crisis. Over the next 12 months, the S&P 500 fell more than 20 percent. But cuts to rates in 1995 and 1998 came alongside a strong rally for stocks.” So the real issue now is what the backdrop is. As it happens, we don’t think the Fed is behind the 8-ball. Economic indicators look good, and while there are pockets of weakness, they are small (manufacturing) or backward-looking (some corners of the labor market). As for the rest of the piece, we think it is a bit of a mixed bag. In our view, it falls into the trap of seeing current rates as oddly high, when they are in reality pretty darned close to average when you look at the whole available history. That seems to us like a case where reality has potential to beat expectations. Ditto the fear-laced discussion of commercial real estate, long overstated as an economic risk. But it also has a rationally optimistic view of the potential for business lending to improve as loan demand rebounds, adding economic tailwinds. Fed loan officer surveys back this view. Overall, this is a measured, if imperfect (in our view), analysis.

MarketMinder’s View: As always, we are politically agnostic, with no preference for any political party or candidate—markets are blind to this stuff, and investors benefit from being the same. Something else about markets: They tend to prefer falling political uncertainty to rising, which is why we note the uptick in Canadian political uncertainty. A couple weeks after Prime Minister Justin Trudeau’s minority government lost its official backing from the New Democratic Party, Trudeau’s Liberal Party lost a crucial by-election in Montreal. The loss is noteworthy because it is the second straight loss in an urban area, which is the Liberals’ traditional stronghold. The next election is due by next October, but there is mounting speculation that Trudeau will call an early contest, which could bring a change in government as the Conservative Party enjoys a polling lead. So there are question marks, which could raise uncertainty to some degree, if we do get a snap vote. In the near term, we expect falling political uncertainty as the US election winds down to overwhelm it at least for 2024. But this is worth monitoring and could add to uncertainty at the margins next year.