Additionally, a number of companies such as AT&T, Comcast, Fifth Third Bancorp, Wal-Mart and Wells Fargo have announced plans to give employees a $1,000 bonus and/or a pay-rise. This will put more money into the pockets of US consumers, potentially creating a virtuous circle (a simple return of confidence).
So far, we have barely scratched the surface of earnings season (only 10% of the S&P 500 companies have so far reported), but if the rest are anything like those that have already reported, earnings estimates and stock prices are arguably too low.
And it isn’t just US equities that will benefit from the tax reforms. The ECB’s December policy meeting minutes released last week stated that the US tax cuts “might have a greater than expected impact on economic growth” and that their impact “had only partially been taken into account in the December staff projections”, suggesting that the ECB may upwardly revise its GDP growth projections.
Furthermore, China this week said that GDP increased to 6.8% in Q4 from a year earlier. As a result, full-year growth picked up to 6.9% from 6.7% in 2016 – its first full-year acceleration since 2010 which underpins global growth.
While I am not complacent and appreciate that there are always plenty of risks (and the obvious ones are a long-term US government shutdown if politicians can’t agree a funding deal; or a potential policy error by the Central Banks by removing monetary stimulus too quickly), I don’t believe this is the time to be exiting equity markets, and instead believe it is better to remain fully invested and enjoy the ride from the rising economic tide.
Elsewhere, this week’s UK CPI inflation data showed that inflation is finally slowing down as the Brexit impact starts to fall out. CPI fell back to 3% in December from 3.1% in November.
Interestingly, looking at the sector breakdown on a month-on-month basis, discretionary items (such as Clothing & Footwear; Restaurants & Hotels) fell the most, while the big gainers were the areas that consumers can’t do without (such as Food; Household Costs; and Transport). Consequently, this will squeeze many households further – suggesting that we may see further cautious trading statements from retailers and leisure companies as consumers are forced to choose between essential and discretionary purchases.
This data makes it obvious that our inflation is predominately being imported (due to a weak pound since the Brexit vote) rather than being domestically generated. And with contracting real incomes set to continue its drag on UK economic growth in 2018, my misgivings regarding the BoE’s recent interest rate increase have intensified – which only strengthens my conviction that the BoE is unlikely to increase interest rates again anytime soon.
In fact today’s (Friday 19 January 2018) UK retail sales data showed the consumers spent 1.5% less in December than November (the biggest month-on-month decline in 18 months) – and while sales for 2017 as a whole gained 1.9%, this was the lowest annual growth in 4 years.
In Germany this Sunday (21 January 2018), the SPD will hold a special party conference on whether to proceed to official coalition discussions with Angela Merkel’s CDU. While it seems that the SPD rank-and-file aren’t that enthralled with another coalition, there appears to be a growing acceptance that a coalition with the CDUs is the best way to renew their party after a disappointing election result last September. So while it isn’t a resounding endorsement, it is likely to be enough to keep Angela Merkel in power.
Additionally we have UK & US Q4 GDP; US & Eurozone PMI data; UK employment data; and an ECB monetary policy meeting.
Ian Copelin, Investment Director