March 2009 was a pivotal month for global equity markets.
After a horrendous period following the implosion of the US sub-prime market and the global economy, that month markets decided that enough was enough and that equities had fallen as much as they should. Despite subsequent massive global economic problems almost everywhere; the implosion of Greece, Ireland and Cyprus; the serious threat of a break-up of EMU; the Brexit vote in June 2016; and the election of Donald Trump later that year, markets just continued on their merry way and have subsequently delivered massive gains for investors. Last week the current US bull run in equities passed its ninth anniversary, which makes this run the second longest in history and the second strongest. Heady stuff indeed!
The gains everywhere have been massive over the past nine years. Since March 9th 2009, the Dow Jones Industrial Average has gained just under 285 per cent and the S&P 500 has gained 311 per cent. Since March 3rd 2009, the FTSE 100 has gained 105 per cent; the German DAX has gained almost 239 per cent since March 6th 2009; and the NIKKEI has gained 211 per cent since March 10th of that year. So, we are currently passing through many significant anniversaries and despite a much greater and eminently justified level of nervousness and volatility so far in 2018, markets are generally holding up reasonably well in the circumstances. Granted the FTSE is down 6 per cent so far this year; the German DAX is down 3.9 per cent; and the NIKKEI is down 3.5 per cent. It could and probably should be worse. However, the Dow Jones is 1.8 per cent ahead and the S&P 500 is up 4.1 per cent.
On the positive side, the global growth story is still very compelling, with most economic indicators almost everywhere continuing to point in an upward direction. The US economy has added 552,000 new jobs in the first two months of the year, which is 20 per cent stronger than the gains made in the same period last year. This global growth story is good for corporate earnings and for equity markets, but it is bad for official interest rate expectations and for bond yields. Bond yields are edging up, with the US 10-year hovering around 2.9 per cent (3 per cent is a pivotal level for equity markets).
However, most worrying from an economic and market perspective is the ongoing free trade approach of President Trump. He is slapping a 25 per cent tariff on imported steel and a 10 per cent tariff on imported aluminium, and he is likely to continue in this vein. The resignation last week of Gary Cohn as head of the Council of Economic Advisors removed one of the last bits of economic sanity from the US Cabinet and strong economic nationalists such as Wilbur Ross and Peter Navarro are becoming increasingly influential. One might have hoped that with the exit of Steve Bannon, who espouses a very virulent form of economic nationalism, economic sanity might prevail, but alas that has not turned out to be the case. The big question of course is how the rest of the world will react, with retaliation looking like a foregone conclusion.
Despite the critics, it is proven beyond doubt that free trade is good. Adam Smith argued in the 1700s that countries should specialise in doing what they do best and import what they do not do best from countries that do it better. In 1817, the British economist David Ricardo argued that foreign trade can benefit all nations. In the contemporary world of economics, there is a strong view that over recent decades trade has helped developing countries to grow and reduce poverty, and that countries who have cut their tariffs have grown faster and have seen less poverty. There will of course be some losers, but it is the role of policymakers to ensure that policies help the losers. Trump seems to believe that free trade has cost many US jobs, but the truth is that technology has had much more to do with blue collar job losses than free trade.
Interestingly, a survey of leading US economists this week showed that when posed with the statement ‘Imposing new US tariffs on steel and aluminium will improve American welfare’, 28 strongly disagreed and 12 disagreed. The sample size was 40. Mind you, Trump will take great joy from flying in the face of the ‘fake news’ propounded by economic experts.
This outbreak of trade protectionism will ultimately damage economic growth if it is allowed spiral out of control and there is certainly a risk that this might happen. One hopes that sanity will prevail, but if the past couple of years have thought us anything, it is that sanity does not always hold sway.
Funnily enough, the equity markets seem relatively unperturbed by the beginnings of a potential trade war. The real question is, how long more can they ignore these worrying developments? The coming months promise to be incredibly interesting from a global trade perspective; from the perspective of central bankers, inflation and interest rates; and from the perspective of Brexit. Lots there to be concerned about and logically one would have thought we should be in for a period of more intense nervousness and volatility on global equity markets.
It will be interesting to see where we land at the 10 year post-March 2009 mark.
The views and opinions expressed in this article are those of the author.
Originally published on www.friendsfirst.ie March 2018