July was a mixed bag for developed equities, those in Europe fell slightly, those in the US continued their rise ably assisted by the continued strength in the NASDAQ index. The recent strength of the euro against the US dollar has played its part in the difference between the performances of the two markets. August started on a firm footing as the European equity markets bounced back on the first day of the month. Equity markets in the US remain completely oblivious to the revolving door at the Whitehouse. One gets the sense that Mr Trump thinks he may still be chairing The Apprentice reality show and he is obliged to fire one member of staff each week. The final failure of the health care bill, which a few months ago caused a few ripples was also greeted with indifference by the investing public.
A columnist in the Financial Times, Lena Komileva puts the bear case for markets in Tuesday's paper, and not very original in her rationale. Equity valuations, particularly the ratio of revenues to US GDP being at an eye watering elevated levels. Equity and bond investors are ignoring the wording from central bankers that Europe, China and the US will either start or continue to tighten monetary policy from here. Ms Komileva believes markets are complacent to central banker’s desire to begin the normalisation process of interest rates despite inflation not meeting target levels. These arguments have been well touted for at least the past year and investors may be starting to believe that economists such as Ms Komeliva are crying wolf.
One possible sign of caution that does not seem to get aired a great deal is a recent weakness in US car sales. July is the seventh consecutive month of a fall in US car sales. This comes after seven straight years of sales growth. As one can see from the chart below car sales have tended to lead the movement in the Dow Jones. Ahead of the fall in equities in 2007, cars sales started to slow. As the chart clearly shows there is currently a clear divergence between car US car sales and the performance of the Dow Jones index. Chart courtesy of Trading Economics