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The resignation of Gary Cohn as head of the National Economic Council is almost certain to trigger further jitters in stock markets, as investors fret over the loss of a moderating force from a US administration whose natural tendencies are anything but moderate.
Speculation that Cohn, a former president of Goldman Sachs, will be replaced by an adviser with more protectionist inclinations has only added fuel to the fire; ever since his appointment, Cohn has been seen as one of the tempering voices in Donald Trump’s inner circle.
While the prospect of the rise of trade ‘hawks’ and the return of protectionist policies is, in my view, a cause for some caution, the return of meaningful volatility to stock markets since earlier this year is something to be celebrated, not feared.
Let us revisit some facts. In 2017, the US stock market, as measured by the S&P 500 Index, posted a flat or positive return in all 12 calendar months. This is not normal. Neither is it normal that there were only eight trading days in the year as a whole that saw market moves greater than one percent, either positive or negative.
But times are changing. A stuttering start notwithstanding, the unwinding of the abnormal monetary policy that has come to define economics and economies since the global financial crisis is truly underway. Central banks, led by the US Federal Reserve are able to increase their policy interest rates precisely because the global economy is at its strongest since the crisis. We are witnessing truly synchronised global economic growth.
This, much like the return of stock market volatility, is a welcome step towards economic normalisation. The trouble is that the global economy has been in the proverbial emergency room for so long that many observers and market participants have all but forgotten what ‘normal’ market conditions feel like.
As the process of normalisation continues, it seems reasonable to hope that rigorous, fundamental analysis will similarly return to vogue, to the ultimate benefit of active investors. The conditions that saw market volatility itself turned into an asset class to be sold to investors had to come to an end at some stage.
Setting aside for a moment the comings and goings in the White House, I believe there is cause for optimism for equity investors. Naturally, rising interest rates, translating into rising bond yields and higher corporate borrowing costs will put stock valuations under pressure. Nevertheless, the strong and synchronised global economic growth should translate into growth in companies’ profitability, and this, in turn, bodes well for share prices.
Although share price progression is almost certain to be lumpier than in 2017, on a sensible, three-to-five-year time horizon, there is the potential to make attractive returns. For stock market investors now, therefore, the key is to keep an eye firmly on the longer term prize.
The ushering in of an era of trade wars and tit-for-tat, protectionist policy would be nothing to celebrate, but I believe the ‘working assumption’ that more moderate voices in Congress should be able to help contain President Trump’s most extreme and potentially damaging tendencies remains intact.
I consider Cohn’s departure from Trump’s inner circle to be regrettable, but it doesn’t imply that deeply counterproductive trade tariffs are now inevitable. Any resulting volatility, however, should be welcomed; for patient investors, it will provide market entry points that have been conspicuously absent of late.
Richard Buxton is chief executive of Old Mutual Global Investors, and manager of the Old Mutual UK Alpha Fund.