This Week in Review | UK Politics, Fed Developments, IPOs

Transcript

Rachael Green:

Hello, and welcome to This Week in Review. This weekly segment is designed to highlight a few important developments you may have missed this week, what they may mean for markets, and most importantly, the potential impact for investors. To stay up-to-date with our latest market insights, subscribe to our YouTube channel or visit fisherinvestments.com. Now, let's review what happened this week.

First, an update on UK politics. British Prime Minister Keir Starmer faces growing pressure after his UK Labour Party suffered historic losses in local council elections earlier this month. That pressure intensified last week when UK Health Secretary Wes Streeting resigned and announced his intention to challenge Starmer for Labour leader and prime minister. If a challenger gains enough backing, the party could be pushed into a formal leadership contest. This creates another source of political uncertainty and adds to the already sour sentiment in the UK. If Starmer refuses to resign and a formal contest begins, the Labour Party would launch an internal election process in which party members and affiliated supporters vote by postal ballot, which could take several weeks. While these events likely create political uncertainty, they also likely interfere with the government's ability to make new policies, especially if Starmer resigns. In that case, gridlock is likely until a new prime minister is elected and the new cabinet is formed. This potentially reduces legislative uncertainty for the time being. And leadership turnover is nothing new in recent British politics, which we believe also reduces the surprise power for stocks. Whichever way this plays out, political uncertainty is unlikely to get much higher than it is now in Britain. And while these events could roil sentiment for the time being— they likely create room for falling uncertainty to be a tailwind as the situation resolves.

Next, developments at the Fed.

Today, President Donald Trump swore in Kevin Warsh as the next chair of the US Federal Reserve. Warsh succeeds Jerome Powell and takes the board seat vacated by Stephen Miran, President Trump's other recent Fed board appointee. Meanwhile, Powell plans to remain on the board as a regular voting member. For some, this leadership change carries added significance because President Trump nominated Warsh expecting the Fed to resume cutting interest rates after Powell. That adds to concerns that politics play a bigger role in monetary policy. But while leadership changes at the Fed can create some monetary policy uncertainty, they aren't automatically negative for stocks. In fact, history shows average and median stock returns have been positive in the six and 12 months following the start of a new Fed head's term. And while speculation swirls about what Warsh might advocate for as Fed chair, no one really knows what a Fed chair will do until they're in that role— not even the Fed chair. And importantly, the chair does not set monetary policy alone. The 12-member Federal Open Market Committee makes those decisions together. This likely limits the impact a shift in Fed chair has on the trajectory of monetary policy in the near term. More broadly, we believe rate cuts, and hikes, rarely shift the direction of markets materially. For long-term investors, we think it's important to monitor broader market trends and fundamentals, alongside monetary policy developments, to determine where the market may be headed next. However, this doesn't eliminate the risk of policy errors, and we will continue to watch how Fed policy unfolds as the year progresses.

Finally, a note on IPOs. Initial public offerings, or IPOs, are back in the spotlight, with several high-profile firms reportedly considering public debuts. That kind of activity naturally draws investor attention, especially from those hoping to find the next big winner. But we think it's important to keep expectations grounded. As we like to say, IPO can just as easily stand for "it's probably overpriced." We believe IPOs often attract more excitement than they deserve, and history gives us good reason for caution. From 1980 through 2024, newly public companies underperformed similarly-sized peers by an average of 3.3% annually over their first five years. To us, that highlights the speculative nature of IPO investing, where a small number of standouts can obscure a much larger group of underperformers. We think there is a simple reason for this. Many IPOs come to market when conditions favor the issuing company, not necessarily when pricing is most attractive for investors. That often happens later in a market cycle, when optimism is already high and expectations have risen with it. That seems to be where we're at with today's technology and AI-related firms. Though that's not to say these companies lack quality or earnings potential. Many appear to be strong businesses. But we think expectations may already be elevated relative to reality. Looking ahead, we think the market's response to major IPOs may offer a useful read on investor sentiment. Not just whether these deals happen, but how investors receive them, could help signal where we are in the market cycle. We think it's best to look away from the market's most hyped areas and toward opportunities where expectations appear more reasonable.

That's it for this week.

Thanks for tuning in to This Week in Review. If you're looking for more insights, then don't miss our other series 3 Things You Need to Know This Week, released every Monday. You can also visit fisherinvestments.com anytime for our latest thoughts on markets. Thanks again for joining us, and don't forget to hit like and subscribe.