These final few days of summer have reflected a very special sense of ease. The light is soft, the sun mild, and the warmth pleasant. It’s a good time to relax.
There’s a similar mood on the financial markets at the moment. Many asset classes have made gains in recent weeks, and this has clearly also benefited our portfolios. Yet we can’t ignore the fact that, behind this rosy facade, the fundamentals are increasingly fragile.
We’re seeing this particularly in the United States, where the economy has lost significant momentum. After years of offsetting weakness in Europe and China, the US is showing clear signs of fatigue. This year, economic growth has fallen from above-average to below-average levels.
This is showing up most notably in larger investments, which companies and private individuals in the USA are now only making cautiously. The slowdown has now also reached the labour market: the number of new jobs created is only a fraction of the previous year’s figure. June saw the first fall in employment numbers for some time.
Historically, sustained labour market slowdowns have, almost without exception, marked the onset of a recession. This is because companies tend not to cut jobs until orders decline or margins come under pressure. The cycle weakens income and consumption – and is accompanied by inflationary momentum, which has picked up again recently. The tariffs imposed by President Trump look set to reinforce this trend in the coming months.
President Trump’s push to remove Fed Governor Lisa Cook from office has undermined confidence in the economic policy order, as has his move to replace the Bureau of Labor Statistics following the publication of unwelcome labour market data. So far, however, none of this appears to have overly troubled the markets.
The kneejerk reaction to weaker economic data is to see it as an argument in favour of immediate interest rate cuts. While this may be true, the high risk of such weakness ending in recession hasn’t been reflected in stock prices to date. Valuations are also largely disregarding the political influence being exercised on independent institutions.
This cool-headedness is nothing new. In earlier episodes of financial market history, well-known risks were also ignored for long periods until they eventually led to sharp revaluations. One indicator that reinforces our view is the gold price. It has reached new record highs in recent months and is highly sensitive to underlying uncertainty.
Our tactical positioning takes this account of this view. We’re maintaining a neutral overall equity allocation to take advantage of this favourable market period. Within this positioning, however, we remain cautious towards US equities. Political influence and the risk of recession don’t warrant an aggressive position. Instead, we are overweight in gold, which has proven especially beneficial in recent months.
Now, in particular, is the time to trust our proven long-term strategy. If you throw caution to the wind in this seductive late summer, you risk being caught off guard by the first autumn storm.
