Reflections of the CIO…

August ended on a high note, with booming stock markets, strong investor sentiment and broadly quiescent bond markets. There were plenty of reasons behind this strength, with the core foundations for the rally built upon a general reduction in market anxiety over President Trump’s tariff policy. A flurry of trade deals plus the implementation of well flagged tariff rates on August 1^st gave markets the clarity they needed to move forward, at least in the short term.[1] This interpretation was backed up by the recognition that the initial effects of the tariff policy were positive, acting to raise US government income at an annualised rate of c. $200 billion per annum without sending inflation through the roof.

In addition, the corporate earnings season was strong, providing little evidence that profit growth was losing momentum. The most obvious illustration of this ‘absence of negatives’ came from leading US technology companies, who managed to deliver the spectacular growth and confident outlooks which their high share prices demanded.

Even some of the seemingly bad news during the month seemed to be interpreted positively by markets. The weakening US labour market was taken as a strong indication that the Federal Reserve would begin reducing interest rates again in September after a nine month pause.[2] Liquidity in general has been ample this year and is a key component of driving risk assets higher. The prospect of imminently cheaper dollars provided another boost to the confident summer mood.

At the same time, it’s worth noting what appeared to be a degree of investor complacency toward developments that, under different circumstances, might have raised concerns. For example, the Trump administration escalated its pressure on the US Federal Reserve, not just through continued personal attacks on the Chairman, but also through the dismissal of a fellow governor, reportedly “for cause.”[3] While the stated justification might support a non-political interpretation, the broader context has led some observers to view this as part of a pattern aimed at increasing political influence over the central bank.[4] Despite the potential long-term implications for institutional independence and monetary credibility, markets showed little reaction at the time. This lack of response suggests investors may be discounting or underestimating the risks associated with political interference in the Federal Reserve. Whilst the immediate market impact was muted, such actions, if they continue or escalate, could possibly have meaningful consequences for investor confidence and policy effectiveness down the line.

Overseas, the political instability in France, policy paralysis in Japan and rocketing government bond yields in the UK had only marginal impacts on the overall upwards trends. We would also note that for the next few months at least, inflation and growth trends in the US are set to worsen compared to what they have been in the last few quarters.[5] Whilst all of these issues can be offset by counter arguments, there are quite a few of them by number, leaving us with the sense that the market will have to slow down a little bit as we travel through some key dates where these issues will come to a head.

In effect, the investment outlook from here is in tune with the seasonal calendar, with the uninterrupted sun of summer being replaced by a mixture of clouds, sun and rain. None of this we would view with any alarm, but neither do we feel the need to step up the risk taking at this point until trends become clearer after a few months of treading water.