As Theresa May vows to fight on, at least for now and it’s probably fair to say another leadership election within the space of a year would probably do the Conservatives no good and possibly lead to greater uncertainty. Theresa May now also vows the end to austerity, it would appear that whoever is in charge now believes in tax and spend is the way forward. This policy can only lead to one eventual outcome, misery. The best way to stimulate an economy is to encourage the private sector through fiscal incentives. Perhaps the British populous, before embracing too many of Mr Corbyn’s populist policies might like to look at what they did to the Venezuelan economy over the past 15 years. Hugo Chavez achieved his aim of equality, every Venezuelan is broke.
It has been surprising how the gilt market has so far reacted to the result and the threat of a tax and spend regime. Yields on the 10-year gilt have fallen below 1% in the past 24 hours, it would not have been entirely surprising to see the opposite reaction as one of the places the government might have to go to will be the bond market for funding. Equity markets have held up well in the UK, the FTSE 100 has had the sterling tailwind but even the 250 index has managed to hold onto gains made this year, so far at least.
The technology sector has been driving most markets ahead, the rise in stocks such as Apple and Microsoft has led to a small number of technology names dominating the S&P 500. The rational for the money flows as investors have seen this sector as one of the few consistent areas of growth as Trump has failed to deliver some of his election promises. The Nasdaq index had outperformed the main index by double since the start of the year, with an annualised return of over 40%. The Tech sector had become very over crowded. Over the past few days, we have seen a correction, with no apparent specific catalyst. One Bloomberg report suggested that a US hedge fund was returning funds to investors and 7 of their largest 13 holdings were the likes of Apple, Google and Microsoft. Whatever the reason, pull backs often happen with no obvious catalyst and they are generally sharp.
Equity markets have enjoyed a stellar run as investors have benefitted from a Goldilocks environment to invest in. Later on Wednesday, we get the announcement from the Federal Reserve as to what they intend to do with interest rates. We will see if the expected rate rise is the catalyst for a broader correction, as occurred in 1994 or if equity and bond markets take the news in their stride. This broader rally will correct, and often described as healthy though never quite feels like it at the time.
Should one try and prepare for the correction? If you do where does the money go? Continues to be the dilemma with developed bonds yielding currently less than the rate of inflation. That hardly feels a very appealing alternative.