Trump sparks share rally
DOWN the decades the record of stock markets as a guide to economic trends has been decidedly mixed. Nevertheless, the sight of the Dow Jones Industrial Average soaring through the 20,000 mark for the first time cannot but lift confidence in the future.
Donald Trump’s way of conducting himself may be abhorrent to many but his businessheavy administration of billionaires and bankers knows more about trade, investment and finance than almost all its predecessors put together. Whether businessmen make for good politicians is a moot point.
But Margaret Thatcher famously said of businessman David Young: ‘Other ministers bring me problems, David brings solutions.’
The current excitement on Wall Street began when Trump was elected on a platform of deregulation of Wall Street and business, tax cuts and fiscal expansion. Wall Street chose to ignore the threats to free trade, notably with Mexico and China, wrongly assuming they would never be carried out.
But after a pre-inauguration wobble markets are starting to like what they hear. Direct intervention – telling the car companies where to build their factories – is not particularly welcome. Wall Street was, however, greatly encouraged when the captains of industry were among the first guests for a round table at the White House. Under his predecessor they might as well not have existed.
What ignited the current rally were some of Trump’s early executive orders restoring the primacy of home-grown energy industries over environmental concerns.
In particular, investors were impressed by the promise to use American steel and concrete to build the pipelines.
This added sparkle to moribund parts of the investment landscape.
None of this takes place in a vacuum. Wall Street is driven by fundamentals. Fourthquarter earnings have been surprisingly strong with 70pc of the 104 Standard & Poor 500 companies reporting so far beating market estimates, with banks among the star performers.
The new president can take some of the credit but much of this was baked in the cake as a result of the careful nurturing of monetary policy and interest rates by the US central bank the Federal Reserve. Stock shocks SHARE prices may be off to the races on both sides of the Atlantic but heaven help the sinner which falls off the wagon. The shock of scandal and £530m of losses at BT’s Italian offshoot was bad enough, and there are many other uncertainties at the telecoms firm.
These include chief executive Gavin Patterson’s warning on public sector contracts, the future shape of Openreach and early indications that the vast sums spent on Premier League and Champions League football rights may not be the licence to conjure up viewers.
Much of this was known before the Italian job and the half-a-billion pounds or so can be absorbed relatively painlessly within the company’s £3bn of positive cash flows.
The puzzle for BT shareholders is why the Italian meltdown knocked 21pc off the share price. One reason is that Italy might have put BT’s dividend at risk, which would make the company unpopular among income funds. But something more profound is happening.
We saw this a week ago when another profits warning from education publishing group Pearson sent the shares down an alarming 30pc in a session. Historically, sudden declines on this scale only occurred if and when a company might be heading to Carey Street.
So what’s changed? Some of the buffers which protected investors from sudden movements have vanished. In the wake of the financial crisis big banks withdrew from market making, matching buyers and sellers on their own account, because of tougher regulation. Before then the market makers or brokers would hold on their books a stock of BT, Pearson or whatever as a shock absorber against sudden movements, to protect clients.
Much trading is now done by ‘black boxes’ driven by algorithms with no concept of creating a market. Stocks are crudely sold as trigger points are reached.
Contributing to all this are index funds. Everyone is grateful for funds which track stock indices, as the management charges are lower. This has been the success of Vanguard and the rapidly expanding exchange traded funds.
The result is that index funds offload automatically whereas a good active manager might, for instance, see BT’s current problems as a reason to buy.
Paradoxically, regulation and technology have made shares even more volatile than in the past so companies and their management are more liable to be speedily punished. That will be small comfort to one million BT investors without the wherewithal to make a great escape. Digital dangers THE Bank of England is known to think Britain’s embrace of financial technology (fintech) offers the City an edge in a post-Brexit world.
Governor Mark Carney warns that the history of financial innovation (weren’t sub-prime mortgage securities and CDOs innovations?) is littered with busts. Among the risks are cyber security, money laundering and terror finance and data protection.
Anyone all in for online banking?