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Should you stay invested and ignore all the noise?

14 September 2018

This week Tony Dwyer, Chief US Market Strategist at Canaccord Genuity and ‘Wall Street’s biggest bull’, came over from his office in New York and presented to our clients. His aim? To give us the real picture of the US economy - what’s driving the markets and where are they heading? The US makes up 24% of the global economy so activity there has a worldwide effect.

                              

 

If you listened to the news you wouldn’t believe that the market is up as much as it is. Fear of President Trump’s next tweet, rising trade war tensions and politics everywhere is all contributing to a panic that the next market crash is imminent. But is all the noise the biggest concern for investors? Tony says no, we need to ignore the noise and look at the data.

‘The mother of all charts’ – flattening curve still not pointing to recession

Tony Dwyer calls this the ‘mother of all charts’ (MOAC) and it displays the US Treasury’s 10-year yield spread alongside previous economic recessions (the red vertical bars). It shows us that  a recession doesn’t occur until the yield curve inverts (goes below zero), but even then, the recession doesn’t happen straightaway.

We have referenced the inverted yield curve in our other commentaries very recently (when short-term interest rates become higher than long-term interest rates), and while we acknowledge that the yield curve may be ‘flattening’, we agree with Tony that we have some way to go before it actually inverts. We have even further to go until there’s a recession, as history tells us that the average number of months before a recession starts following an inversion of the yield curve is around 19 months.   

So, should the real worry for investors be that they take too much heed of all the negative news headlines, pull out of the market and miss out on another two years of market gains? Mr Dwyer believes there is a compelling case to buy right now. Why?

     1. Strong economy and confidence

During his presentation, Tony cited many US data sources to evidence this, including:

  • Direction of earnings – equity markets are closely correlated to the direction of earnings and earnings have grown 20%+ this quarter
  • Manufacturing – the Institute for Supply Management (ISM)’s manufacturing index which is based on surveys of more than 300 manufacturing firms, is in positive trend. What’s more, research shows that a cycle high in the ISM index leads a US recession by 31.5 months
  • Consumer and business confidence at all-time highs – the small business confidence index (NFIB) hit a cycle high in May. Historically after the last seven cycles, there has been a 41-month lead time between a high in this index and a recession.

     2. Maturing millennials

The peak birth year of millennials (those born in 1990) are just getting to the age that is associated with household formation and increased spending. Home ownership and spending are on an upward trajectory and that’s not going to stop any time soon. This is showing up in the recent uptick of historically low ‘homeownership rate’ in the US. With this huge demographic not slowing on spending but rather most likely increasing spending in the next few years, the equity market is looking attractive.

Tony Dwyer’s key message?

Tony isn’t denying that markets won’t crash ever again. What he is saying is that politics and news headlines – or ‘noise’ - don’t correlate to a crash but the economic fundamentals do. Looking closely at historical data and what it’s telling us today shows we have some time to go yet.

We would expect some volatility as politics and trade issues hit headlines over the coming months but perhaps the biggest fear for investors should be missing out on the upside – not President Trump’s next trade deal (or no-trade deal).

 

Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested.

The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity.

Past performance is not a reliable indicator of future performance.

Where investment is made in currencies other than the investor’s base currency, the value of those investments, and any income from them, will be affected by movements in exchange rates. This effect may be unfavourable as well as favourable.

Photo of Tony Dwyer

Tony Dwyer

Chief US Markets Strategist

Tony Dwyer joined Canaccord Genuity in March 2012 as the firm’s Equity Strategist in the United States after serving in the same role at Collins Stewart LLC. In addition to serving as Equity Strategist at Collins Stewart , Dwyer also held the additional role of Director of Research and sat on the firms Executive Committee. Dwyer started his equity research career at Prudential-Bache Securities in 1987 and served as equity market strategist at a number of small regional brokers firms prior to joining FTN Equity Capital Markets in 2003. At FTN, Dwyer served as an equity market strategist and was a member of the FTN Midwest Securities Investment Committee (IC), where he was later appointed to chair the IC in 2006. Dwyer is a graduate of Le Moyne College where he earned a Bachelor of Arts degree in political science.


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IMPORTANT: Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. Past performance is not a reliable indicator of future performance.

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