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Quotidian Investments Monthly Commentary – March 2018

April 6, 2018

The turbulence that has dogged global stockmarkets since late January reasserted itself from the third week in March through to the end of the month.  A downturn in January/February (during which all major markets around the globe saw a 10%+ fall in valuations) had recovered rather quickly (certainly in less than the 3 months we would normally expect such a recovery to take) and so it came as no surprise to see a further correction before prices begin to move higher again.

Just to put this current period of market instability into focus for you let me compare the last quarter of 2017 with the first quarter of 2018 by illustrating the number of trading days that the market moved by more than 1% (either up or down):

  • in the first quarter of 2018 the S&P 500 index moved by greater than 1% (up or down) on 23 trading days (of the 62 trading days in that quarter) whereas, by comparison, in the last quarter of 2017 (also 62 trading days) it did not exceed that 1% daily movement even once.Zero trading days of volatility!
  • Similarly, the Nasdaq index exceeded 1% daily movements on 25 trading days in the first quarter of 2018 compared to just 6 trading days in the final quarter of 2017.
  • And just for completeness, the figures on exactly the same bais for the FTSE 100 index are 13 trading days during the first quarter of this year set against only 4 trading days in the last quarter of 2017.

Equity markets are, of course, inherently dynamic and have occasionally bouts of extreme volatility but even in such periods of uncertainty there are usually still sectors and individual stocks that will hold up and continue to grow despite general market unease. Having said that, even these sectors and specific stocks are not immune from typical short-term market gyrations.

Market makers were keen to ascribe the March mark-downs to concerns over a potential global trade war as a result of President Trump’s decision to impose tariffs on steel and aluminium imports to the USA.  Having observed and analysed Trump’s negotiation tactics over the past year or so (which typically begin with heavy artillery as a means of kick-starting real negotiations) we see these comments from marlet-makers and, strangely, from largely left wing dominated media sources as nothing more than disingenuous and self-serving.  Trump’s real target is China and, in particular, the detrimental effect that its subsidized and therefore artificially cheap exports to the US have on US industry and employment. 

In line with Trump’s typically and quite deliberate bullish opening salvo with the simple intention of bringing about a negotiation, we have no doubt that the US and China will successfully resolve their trade issues through dialogue and conciliation.  Indeed, the fact that China’s retaliatory tariffs have already been introduced and can be seen to be more for appearance and face-saving purposes, indicates that China is very willing to ease the intensity of any potential trade conflict.  The fact that their new tariffs are not substantial and do not cover some of the US’s biggest exports to China is a reliable signal that Beijing clearly wants to avoid an all-out trade war.

Of more relevance to the real world and genuine stockmarket action, a sell off in technology stocks was sparked towards he end of March when Facebook was found to have enabled the unauthorised use of personal data by one of its associates (Cambridge Analytica, a company that specialises in data mining and analisis for political and advertising purposes).  The concern is that this careless, not to say cavalier, approach to personal privacy could lead to the introduction of new and intrusive regulation across the technology board.  However, any move towards regulation would rather overlook the fact that Facebook users have freely chosen to put their personal details on display in the public domain in the first place.

Before leaping to ignore personal freedom of choice in favour of regulation and control (increasingly the favoured political response to every tiny area of our private lives) our poltical classes would do well to take into account that the world is run on US software.  From work productivity to entertainment, from graphic design to database management, the world runs on ubiquitous American software.  In essence, US software is the world’s operating system and any restrictive regulation upon it could have unintended, expensive and undesired economic effects. 

Reverting to the subject of potential trade wars, it is very unlikely that foreign governments would decide to place restrictive tariffs on these American technology products as it would immediately increase prices for almost every sector of their own economies, including the costs of running their own governments.

In the UK and Europe, it may simply be coincidental but it does seem rather strange that the Italian election result (dominated, as expected and trailed in last month’s report, by the two successful anti-EU and anti-euro parties) has been closely followed by a complete change of tone and attitude towads the UK by the EU’s Brexit negotiators.  Hopefully, if the EU’s more realistic approach is maintained, this will be reflected by a more positive tone in the UK stockmarket too.

Over the next few weeks the 2018 first quarter reporting season will begin. Advance estimates suggest that those companies that comprise the S&P500 Index will report that earnings growth will have risen by 17% in the first 3 months of this year; if so, this would be the largest increase in profits since the first quarter of 2011. Whilst we wait to see whether this apparent surge in profitability comes as a result of increased sales and/or lower costs (increased efficiency) or is largely a function of the new tax regime introduced by Trump’s administration, increased profits should be reflected in share valuations.

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