Politics, volatility, and market fundamentals

Month after month US unemployment numbers are hitting record lows. This is good news for workers but wages are not as growing as fast as they were. The pessimists have so far been proven wrong as their argument about low unemployment should lead to higher wages hence high inflation has not materialized. Does this mean interest rates are not going up any more? Or going up by far less than expected. I think central banks need to revisit the way they calculate the rate of inflation when setting a target or when they formulate their monetary policy.

I believe technological innovation that is improving efficiency, reducing costs and increasing productivity is holding back inflation. It is not easy to measure the impact of technological innovations that are used by literally every industry segment. But, if this is true then we might be in a long run of low interest rates and low inflationary environment. Central banks will ultimately take note of this new development and will find ways to account for it when setting inflation target and an accommodative monetary policy.

I think prudent investors are coming along with this argument and were happy to target those sectors that benefit most i.e. technology sectors. This has been the case over the past few years. What has changed this year is some changes in US trade policy against China, Russia and some others plus some company specific such as the case with Facebook and Amazon. It is not easy to ignore any world trade friction that to do with trade tariffs or trade protectionism. I think this is overdone. Tariffs tend to be in retaliation for something else. Protectionism recedes and declines but global trade generally continues. Investors should focus on the long-term factors that affect the performance of the stock markets rather than short term worries. Sometimes, market corrections could be buying opportunity for long term investors.

Moving away from political jitters and focusing on the US economy is that is showing further strength in job creation and wage growth is what matters to the market at the end. The latest US employment data show a sharp rise in payrolls, while the unemployment rate stays low at 4.1 per cent and wage growth has slowed down a bit, which is giving some reassurance about the threat of wage inflation. Corporate and individual tax cuts plus infrastructure spending are yet to feed through the economy in the coming months. These should be positive for corporate revenue and earnings.

Trade war
How much the recent tit for tat between Donald Trump and China is worth? $100 billion! The world economy is worth trillions of the dollar . Of course, there is a talk of trade war issues, which leads to market uncertainty. But the most important factors that affect the markets are the economy, corporate earnings valuations and the outlook. US corporate earnings should show solid growth this year. It does not make sense for a market to go down when all the fundamentals are improving at the same time. I expect the technology sector to report good results for the first quarter of this year. Strangely, this is the sector that has been sold aggressively. I believe the technology sector will push the market higher after the earnings result out of the way.

Short term investors may try to play the market but I don’t think they will succeed. As for long term investors my advice is to ride the short-term volatility as the underlying fundamentals are improving by the day. History is on the side of long-term investors. Since the crash of 2008 and March 2018, the US S&P500 delivered 15 percent and the Nasdaq Index delivered 20 percent both on annualized basis. The argument is quite simple. If the recent small corrections do not cause big damage to corporate profitability and investors sentiments then this could be a good buying opportunity for long-term investors. @Rasameel

By Hayder Tawfik

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