After a superb year for stock markets in 2017 (the major markets averaged 17% gains), 2018 was a year that started where the previous had left off. By mid-January the S&P 500 was up around 7.5% and the Hang-Seng had risen by a staggering 10%, as investor optimism about the outlook for world growth continued unabated. Interestingly, the FTSE 100 hardly moved during this initial period as continuing concerns over Brexit (what else?!) led global investors to look outside the UK for equity exposure, a theme that has endured ever since the vote in 2016. Then, on 29th January, markets came crashing back to earth.
Markets have endured a torrid three months, driven by concerns over interest rate moves in the US, the ongoing trade war between the US and China and faltering Brexit negotiations. The average equity market has fallen by c9% since 1st October, erasing gains from earlier in the year and setting up 2018 to be possibly the worst year for markets since 2008.
The said, whilst it has been a very difficult year for equity investors, it has been materially worse for those investing in oil. Earlier in the year oil prices rallied to $86 a barrel, a high not seen for three years, before plummeting a staggering 29% since the beginning of October. Oil is now down nearly 10% for 2018. With investors understandably concerned mainly with equity market valuations, it is easy to underestimate the significance of oil price movements and their impact on the global economy. This month we consider what has caused the huge swing in prices over the year and how the price of oil might affect the global economy during this period of high uncertainty across all asset classes.
As has been widely publicised, after a quiet summer equity markets slumped in October. The FTSE 100 fared relatively well compared to other global equity indices, a marked change from recent relative underperformance, but was still down 5.09% in October. The S&P 500, representative of the 500 largest companies in the US, was down 6.94% and Hong Kong’s Hang Seng index fell by over 10%. The Tech sector suffered more than most, with the MSCI Information Technology sector down 9.43%.
As a Republican President, Donald Trump has enjoyed a majority in both the House of Representatives and The Senate since his election. However, the problem for him has been that his majority is slim and that some of his own Republican members of Congress don't believe in his policies or what he stands for. After November 6th, when the US public head to the polls to vote in the midterm elections, Donald Trump could well lose this slender majority in either or both Houses. These elections are seen as a stark choice between Trump's ideologies on the one hand and just about anything else on the other. He's desperate to win, not least because losing control of the Houses would turn him into a "lame duck" President. If he does lose control, then of more concern must be the possibility of personal impeachment after the scandals that have dogged him and his entourage over the past 24 months. This makes the US midterms a make or break for the embattled President.