Having raised interest rates in the US on 17 consecutive occasions to stand at 5.25%, the US Federal Reserve has since the middle of last year left them totally unchanged.
Whilst the next move was widely anticipated to be a rate cut, albeit not until later in the year, the latest statement from Fed Reserve Chairman Ben Bernanke has again cast doubts over the exact situation of the US economy.
Unfortunately, for the markets this added confusion comes hot on the heels of general US economic concerns, culminating last month in the sub-prime mortgage sector shakeout.
As former Defence Secretary Donald Rumsfeld famously observed – “as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns -- the ones we don't know we don't know.”
Perhaps that is the kind of clarity the markets felt they received yesterday.
And herein lies part of the problem.
Some of the data that has been coming out of the US has been conflicting. At the same time, it has become a preoccupation in the US to analyse each Federal Reserve statement, be that oral or written, on a word by word basis to anticipate exactly how the Fed is thinking and what its next move might be. Equally, the Fed’s decisions are driven by the data it receives and, if this is telling different stories, so it becomes more difficult to be definitive about how the economy stands. And so the circle goes on.
Meanwhile, the rest of the world looks on.
For many markets, particularly the more developed ones, the fact that they are effectively conjoined with the US means that any such developments Stateside need to be digested before the domestic market can move on.
Major exporters to the US, for example, will be affected by any downturn from the US consumer. Companies which do much of their business there will also find trading more difficult (it has been estimated that up to half of FTSE100 earnings are dollar denominated or dollar reliant). In addition, housing as it does the world’s largest exchange, market sentiment and general investor confidence will pay more than a passing glance to the state of the US psyche.
This is not to say that there is no line to be drawn at all between the UK and the US. It is generally accepted, for example, that whilst these two major economies share many similarities, in terms of the economic cycle they are probably in slightly different places at the moment. In terms of the way business is conducted, the recent ructions resulting from the US sub-prime mortgage sector are unlikely to be repeated in the UK, since lending criteria is notably more stringent and, in any event, the UK is far behind the US in generally using (usually) the individual’s biggest asset as the be all and end all of their financial commitments, to the extent of remortgaging to the hilt as has happened in the US for the sub-prime market.
In all, these remain difficult times in world markets and investors should remember that investment should be seen over the medium to long term. A number of factors could yet reignite the market – the recent reignition of Merger & Acquisition activity will do no harm on this front – but in terms of the US economy, what will be crucial is the clarity of the economic data which continues to come through, as opposed to the nuances of a written statement issued by the Fed.
If you’d like to read more free research, comment and analysis from me and the rest of my colleagues at Hargreaves Lansdown please visit our website at www.hargreaveslansdown.co.uk
Richard J Hunter
Head of UK Equities
Hargreaves Lansdown
www.hargreaveslansdown.co.uk