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Before we look at markets we must pause and reflect on the lives lost in the US from Hurricane Helene. As I write this, over 120 are dead and over 600 people are missing. Along with the terrible loss of human life, the financial toll of Hurricane Helene continues to climb, putting the storm that battered parts of the US Southeast on course to be one of the country’s costliest. AccuWeather estimates the total damage and economic loss from Helene may be as high as $160 billion. That is up sharply from the $95 billion to $110 billion range it forecast late last week, before the magnitude of the devastation became apparent. If losses match those preliminary estimates, Helene will go down as one of the nation’s top five most costly storms ever.
In the Middle East, the conflict has escalated further. Israel has started an incursion into Lebanon, in what at this stage it claims is a limited and focussed strike against key military targets in the border area of Southern Lebanon. This is the first land operation since 2006, when a 34-day war with Hezbollah ended in stalemate. This drew an immediate response from Iran launching a ballistic missile attack on Tel Aviv and Jerusalem.
The better news this week has therefore been in markets, as China’s latest stimulus efforts have driven a short-term recovery in global emerging market equities. We have been spending time thinking about how 2024 has been a better year for global equities overall, and how this momentum can keep going into the final quarter.
Since the great financial experiment of Quantitative Easing first began in March 2009, markets have been supported by huge levels of liquidity from central banks. With historically low savings rates this money found its way into equity markets, that despite volatility along the way, rose throughout the 2010’s right up until Covid. The global pandemic brought with it a new wave of stimulus that saw a sharp recovery in equities from April 2020, before markets struggled for direction in the inflation fuelled sell off in 2022. As we hear every day about banks tightening their belts and removing liquidity from the marketplace, how will equities fare in the coming months and years?
The first unknown is the effect of rising geopolitical risks, especially in Ukraine and the Middle East, along with the US elections on 5th November. If we leave those to one side for now, we can consider how liquidity will continue to drive markets moving forwards.
Those with a rosy outlook on life could well suggest that prices are anticipating an increase in liquidity that will be driven by US Federal Reserve (Fed) rate cuts, and indeed interest rate cuts in the UK and Europe. As rates fall that should, above all else, equal increased credit creation (indeed total bank credit has been rising gently since early this year). Credit creation is money creation. We will have to see if this plays out; if there is a recession, it will not. We could argue that the most important form of liquidity creation is government deficit spending, which is and has been very high and overwhelms every other measure. With an eye on the UK Budget this month, we could even say “so long as deficits stay high corporate profits will stay high and the market will rise”?
I appreciate that I have my clients’ best interests in mind when I am seeing reasons for the markets to stay positive. Luckily, I also have a very good investment team who are carefully monitoring the situation and have a plan, b, c and d if matters don’t quite go to plan. But to return one last time to a positive mindset, it is important to remember that there remains a lot of cash around, but it is just sitting there on deposit and in money market funds earning a decent yield, which is starting to fall, rather than chasing risk assets. This theory would imply that as rates and cash yields fall further, the money market funds will be sold and moved into equities, thus sustaining the rally. I like finishing the week in a positive mindset, so I think, on that note, I will wish you a good weekend.
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