“… all great world-historic facts… appear, so to speak, twice… the first time as tragedy, the second time as farce” – Hegel/Marx
Twenty-five years ago, 19 October fell on a Monday – ‘Black Monday’, which saw the biggest ever one-day percentage fall in US stock prices (20% for the S&P500, still the record). Alongside the headline article titled ‘Rout on Wall Street’, the front page of the next day’s Financial Times – cover price 40p – also reported simmering geopolitical tensions around Iran, and urgent moves by European officials trying to rescue a currency accord…
Following the crash, economists solemnly cut their forecasts for growth over the year ahead – only to discover that, after some assistance from central banks, the global economy barely missed a beat, and went on to boom in 1988/9. The US stock market quickly rebounded, and as profits grew, regained its previous high within two years.
The broad similarity with the current situation – a financial shock, followed by extreme but ultimately excessive pessimism – needs to be qualified. The crisis that hit in 2008 has been more severe, and has already cast a much more substantial shadow than the crash of 1987. That crash quickly became seen as a correction to an overly-rapid ascent: the S&P 500 had trebled in five years, and by the standards of the day, valuations had become stretched.
That said, the origins of the current crisis were indeed largely financial in nature. Regular readers will know that we think the US consumer in particular is in better health than recent gloom implies. We see US household net worth as – literally – a lot more balanced than does the debt-fixated consensus. And the latest data is hinting that that we may be facing one of the biggest collective economic rethinks since – well, since 1988.
Just when most pundits have been worrying about those US consumers, and the further threat posed by the ‘fiscal cliff’, consumer confidence has been rising – on some measures, back to 2007 levels – and, more importantly, spending has been following suit. The housing market is about to contribute substantially to GDP growth. And because the rest of the world is still significantly affected by exports to the US, there is potential for some stabilisation there too (data for China and even the troubled euro area seem to be bottoming).
Moreover, an economic revival in the US could have a structural component as well as a cyclical one, by virtue of a new wave of industrial innovation; some levelling in relative wage costs; and an improvement in relative energy costs. After the slowest-growth decade in half a century, the ‘new normal’ is now old hat: US trend growth is likely to rise, not fall, from here.
It is too soon to celebrate unrestrainedly. US politicians have still to exhaust all the alternatives before doing the right thing – compromising – on that ‘fiscal cliff’. The euro area clearly retains the ability to disappoint – especially with Spanish 10-year yields seemingly closing on 5% (downwards). But there are positive risks to growth and profitability as well as negative ones, and we advise long-term investors with low exposure to developed world stocks to use setbacks to add to it. The stock market train has not yet left the station, but another tentative upward trend in core government bond yields may suggest departure time is approaching.
Kevin Gardiner, Head of Investment Strategy EMEA