Markets Weekly podcast – 18 November 2024
18 Nov 2024
Behavioural finance: US election and UK Budget special
14 October 2024
In this week’s podcast, Alex Joshi, our Head of Behavioural Finance, discusses the geopolitical factors currently influencing investment decision-making, with a particular focus on the UK Budget and US election. Key topics include the behavioural biases that can impact portfolio positioning and the effect of political news headlines.
As podcast host, Julien Lafargue also ponders the latest meeting notes from the US Federal Reserve, the opening of the corporate earnings season and US inflation.
You can also stream this podcast on the following channels:
Julien Lafargue (JL): Welcome to a new edition of Markets Weekly podcast. My name is Julien Lafargue, Chief Market Strategist here at Barclays Private Bank, and I will be your host today.
As usual, we’ll first go through last week’s events, before welcoming a guest. And today, I’m very pleased to be joined, after a trip to Saudi Arabia meeting clients, by Alex Joshi, Head of Behavioural Finance here at Barclays Private Bank, to discuss investor sentiment and maybe some of the key takeaways from his trip in the Middle East, and what clients think about the world these days.
But first, let’s move on to last week’s events. Well, it was really all about the US inflation data, and it was a rather solid week in markets. Despite an upside surprise in inflation, we have to say, the consumer price index in the US was up 2.4% year over year in September. That was a step down versus August’s reading of 2.5%, but it was higher than expected. The consensus was looking at 2.3%, so nothing too dramatic, but still an upside surprise, compared to expectations.
Now, if you exclude energy and food prices, so looking just at the core inflation, it was still up 3.3% on a year-over-year basis, which was again 10 basis points higher than what the market had expected.
The key was that the surprise came where it was least expected. Well, shelter costs, so housing costs, which have been extremely sticky in the US, finally cooled to 0.2% month on month. It was 0.5% in August. Used cars and apparel ticked up, which means that the inflation dynamics are not really going in the right direction, so to speak. And this is at odds with what we heard from US Federal Reserve officials last week, in the dovish FOMC minutes, in particular.
So, we got the minutes from the last meeting, the September meeting, where if you remember the Fed decided to cut interest rates by 50 basis points and, looking at the minutes, it turns out that most participants, a substantial majority to be precise, supported that 50 basis-point interest rate cut. But almost all of the FOMC participants agreed that the upside risk to inflation had diminished. However, the latest reading, in terms of CPI, seems to contradict that view.
The good news, though, is that the market has already priced in only a very small probability of the Fed keeping interest rates on hold in November. So, if you remember, we went from 50 basis points being a 50/50 chance in November to completely pricing out that 50 basis points and focusing on 25 basis points as a cut next meeting. Now, the market is not fully pricing in that 25 basis points, reflecting that upside surprise in US inflation.
Now, finally, the last piece of the puzzle from last week was US earnings, or the start of the third-quarter earnings season, with, as usual, the US banks starting to report. And what a decent set of results from both JP Morgan and Wells Fargo. They were the two main banks reporting on Friday, and results came in better than expected.
Of course, capital markets and investment banking activity were standout performers. They’ve had a tough time recently, so it’s normal to see some kind of rebound there. But, most interestingly, from a macro perspective, both banks saw net interest income increase by roughly 3%, compared to a year ago, which is quite a solid outcome in the current context.
And the other key point was the fact that Q4 guidance, so their outlook for next quarter, was broadly in line with consensus estimates, suggesting there is a continued momentum. So, of course, we’re going to get a lot more earnings this week, but we’re off to a strong start.
Now, let’s move on to our guest segment, and speak a bit to Alex to get his feeling, and clients’ feelings at this point in time, after his recent trip to the Middle East. I think, look, we’ve discussed a few things only today, but there’s a lot happening at the moment. We’re thinking, you know, of geopolitics, the US election, and closer to home, the UK Budget is coming up. I’m sure it must feel like a lot to digest for everybody, and our clients in particular.
I know a lot of investors are asking me, OK, so how do I position, in this context? And the overall feeling tends to be that it may be better, for now, to just wait and see, because there are so many potential catalysts on the horizon, so waiting for that clarity could be the best thing to do before making any decision.
So, Alex, let me start by asking you what you would say to those investors that like to wait and see, let’s say, for example, for the US election outcome?
Alex Joshi (AJ): Good morning, Julien. Thanks for having me. It’s good to be back. So, yeah, firstly, just a point around sentiment and my views, just based on conversations I’ve been having recently.
So, I’m finding, when speaking to investors, that sentiment is relatively bullish and investors, on the whole, are pretty optimistic, and I guess that does make sense when you look at the index levels. But I feel that, as you made reference to in the question, you know, investors are keeping a close eye on a lot of events going on at the moment. It can, at times, be a little bit overwhelming to sort of make sense of everything on the horizon.
Now, on the question about waiting and seeing, so let’s say for the US election, I also experience this quite a lot. I think it’s very common to want to do that, because uncertainty is uncomfortable. And I guess the key message, I would say here to investors, is that one of the few things which is certain in investing is uncertainty, unfortunately. It always exists.
You know, last week on the podcast when you were speaking to Nikola and you were talking about options, you know, volatility spiking in the run up to the election and just after it. And volatility, whilst uncomfortable to experience as an investor, doesn’t necessarily stop one from reaching your long-term goals. So, I think that’s one key thing for investors, in particular for long-term investors, to keep in mind, is that this uncertainty, and the volatility which is associated with it, that creates these bumps in the road is uncomfortable, but it’s important to keep that longer-term perspective. Because, for many investors that are waiting for certainty, they can find themselves, you know, on the sidelines for a long time.
And if you’re holding cash for a long period of time, waiting for that perfect entry point, it’s important to keep in mind the costs of holding cash, in the sense of the opportunity cost of forgone investment returns, as well as the erosion from inflation. You know, this year, despite everything that is going on and everything that’s on the horizon, indexes have still been hitting all-time highs.
If we take the S&P 500, for example, and we think about performance since the last Fed hike in the summer of ‘23, cash has given an investor a return of roughly 7.8% in that period, whereas US equities would have returned 32.8%.
So, even in this period where there’s a case for potentially holding cash to wait for a bit of certainty, especially given the higher rates of return that you could get from it, you know, there’s still the opportunity cost of those investment returns.
One point I’d make about cash is it can seem like a passive choice, a choice to wait and see, and investors can view it as, OK, I’m just waiting. I’m pushing this decision further down the line. I’d reframe it slightly and say that, you know, it’s also an active choice to be holding cash. And so, as an investor with goals that one’s trying to achieve, it’s important to take into account, you know, the risk-return implications of holding cash and how that will affect your goals.
And finally, on the US election in particular, it’s something that, of course, you know, both you and I have written about in the last few months, and I think it’s important just to remind investors when it comes to elections, in the US as well as in other countries, that it’s, in most cases, the state of the economy which matters most for subsequent equity-market performance, rather than any party or candidate that wins, because in most economies you’ve got checks and balances.
In the US, you know, a president’s ability to govern and to implement their platform is going to be largely dependent on the shape of Congress. And there’s also, you know, there’s also a very big difference actually between, you know, what is said on a campaign trail and what gets implemented. So, I think it’s important there to separate the politics and the political headlines from the economics and the investing.
JL: I think you made an interesting point that most of the investors you talk to were bullish, and I think that that’s a fair assessment. Equally, I don’t think we’re seeing people running out to invest and, as you rightly pointed out, there is a lot of discussion around, you know, cash is on the sidelines, should I invest, should I not invest, should I wait? I’m just going to say that there are currently $6.4 trillion sitting in money markets, meaning there is a ‘ton’ of cash on the sidelines, and I’m sure a lot of people are sharing that feeling of maybe I’m just going to wait.
And, if anything, this is a good thing for a current investor and for markets, meaning there is a lot of pent up demand behind markets at the moment, and those $6.4 trillion or so will need to find a new home, as interest rates come down.
Now, you often speak about all the biases that we as investors are subject to. We’ve got quite a few of those. Which one would you say is maybe the most relevant at this point? Which biases should we be most aware of?
AJ: There are two which are particularly important to be thinking about. And one of them just came to me as you were talking about the cash on the sidelines.
So, the first is the ‘availability heuristic’. And so heuristics are mental rules of thumb, things that we use to navigate the world to simplify decision making. And the availability heuristic simply says that things which are more readily available in our mind, take up more space.
So, when we’re thinking about investing, news headlines which are more dramatic or more emotive are the ones that we typically will pay more attention to. So, for example, this morning, on the way into the office when I was looking through the FT and I was scrolling through the headlines, the ones which are the more dramatic ones are the ones which, you know, took my attention. The ones I clicked on, the ones I spent a little bit more time thinking about.
And the issue with that, the risk to an investor of doing so, is typically inaction, the sitting on the sidelines in cash that you make reference to, because those more dramatic and more emotive headlines in most cases are going to be negative. We also, you know, we need to take into account that the news needs to be sold and ‘what sells’ is things which are a bit more emotive.
And the downside of paying more of attention to that, is that, as an investor, it becomes quite easy to then forget some of the long-term data and the trends which are relevant for one’s own investment journey. So, you focus very much on the very dramatic things, which in many cases are going to lead to a thought of, actually, let’s wait it out, let’s wait for some of this stuff to pass. And it can also affect both your composure and your satisfaction with being invested, if you’re, you know, focusing on all the negatives. So, that’s the first one, the availability heuristic.
The second one is ‘confirmation bias’, and this is something that gets spoken about, you know, at all times of year and all times in the investment cycle. But, I think it’s particularly relevant when we’ve got geopolitical issues and we’ve got elections.
So, the confirmation bias is a tendency that we all have to seek out, and pay more attention to, news and views which confirm our own pre-existing views and beliefs. And obviously, in times of elections, where you’ve got, you know, dramatic headlines and announcements etc, it’s quite easy to go down a hole where you seek out information that confirms views that you have.
Now the issue with that, when it comes to investing, is, you know, for one it can lead to some degree of over-confidence, in the sense of you believe that this is an outcome that’s going to occur and these are going to be the likely implications and, you know, that in many cases can lead to investors attempting to sort of trade around particular events because they’ve got a strong belief that something’s going to happen and this is going to be the implication. So, you have that, which if you’re a trader is fine, but if you’re an investor that might not, you know, completely aligned with what you’re seeking to do long term.
And it can also affect asset-allocation decisions, because if you’ve got a very strong view that something is going to happen then you’ll have a tendency to perhaps be a little bit less diversified, to kind of go all-in, to some degree, expecting a particular outcome, and both of these things together have this, you know, likely impact of potentially waiting on the sidelines and not participating altogether. Or, for those who are, potentially paying a little bit too much attention to some of the things that are happening in the short term, you know, at the expense of the long-term investment journey.
JL: Yeah, and I think listeners should remember that once we get past the US election, let’s say, this is maybe the biggest question mark at the moment, there will be another issue that will also be raising the uncertainty level. As you mentioned, after all, media, newspapers, they have to sell, so they will find another issue that people should be worried about. Anyway, maybe practically, how do we, as investors, in your view, overcome those issues?
AJ: So, I think overcoming them, we can attempt to overcome them across a few different fronts. So, I think there are three which I’d focus on. So, the first is news, the second is the use of experts and the third comes to the portfolio.
So, from the news perspective, I think, you know, very simply the importance of diverse viewpoints, looking for unbiased reporting which is more factual. So, focusing on facts over stories and narratives, and trying to distinguish between the emotion and the underlying story there, and thinking quite specifically about the implications of that, to try and move away from the narrative and actually thinking about, OK, these are the facts, how does this impact the market, how does this impact a portfolio? So, that’s on the first one around news.
The second is around experts. I think it’s important to be talking through views and decisions around wealth and investment portfolios at times like this, with someone that can give an impartial, professional sort of opinion on those decisions. And the reason for that is to try and sort of limit the emotion and the bias which potentially can feed into decision making, because it’s very difficult to de-bias ourselves as human beings, but what you can do is try and kind of work around them, take into account our own tendencies and speaking to someone about that can help.
And thirdly, around the portfolio. I think it’s very important, especially if we’re talking about, you know, elections, to distinguish between political headlines and the market, because not every political headline is going to have a significant impact on the market.
And then, it’s also important to distinguish between the market and one’s own individual portfolio, especially if an investor’s holding, you know, a well-diversified portfolio which follows a robust investment process, because many of the things which are currently taking up the headlines would not necessarily have, you know, a very significant market impact, and then that market impact is not necessarily going to translate into the portfolio.
I think there’s a tendency to think about the impact of all these events at a market level, but, of course, an individual investor is holding their own individual portfolio, and so that’s the focus, that’s where investors should be thinking about and trying to take a bit of a step back from the high-level storylines and moves that are going on there.
JL: These were very important reminders, Alex. Thanks a lot. Anything else that you want to leave our listeners with? Any last comments? I think we’ve covered a lot, but.
AJ: Yeah, so I think I’d end just very briefly with I think four things that all investors should be sort of clear on and keep in the back of their mind when investing during these markets, and actually in any markets.
So, one, I think it’s important to be very specific on one’s own individual goals. So, what are you seeking to achieve, the time horizon associated with it, being very clear on what the goal for the investing is.
Secondly, having a plan on how you’re going to get there. So, thinking about wealth planning, thinking about investments, having a strategy that you’re going to follow. So, being as specific again about the plan to reach those goals.
Thirdly, to expect that at some point that plan is going to be disrupted, there’s going to be unexpected events, when, as you mention, as we pass some of these on the horizon there’ll be new things that come about. So, putting in place things from a both financial as well as a behavioural perspective to try and navigate some of these unexpected things.
So, from a financial perspective, that would be, you know, having a well-diversified portfolio, which is one of the few ways that you sort of can protect against the unexpected. From a behavioural perspective, it’s agreeing, ahead of time, about the actions that you’ll take or not take in response to certain events.
And fourth, and finally, the importance of thinking about risk in the context of one’s own investment journey. So, we talk very much about, you know, risk, geopolitical risk, and risk is typically associated with volatility. But it’s extremely important, when there’s a lot of discussion about risk, for all investors to remember that the key risk should be the risk of not achieving your own individual financial goals.
So, I think that’s the final comment I would make here is just remember to be as specific as possible and keep focused on your own portfolio, your own goals, your own journey, which can, I think, help to sort of navigate a bit of the turmoil that’s going on presently in markets.
JL: Excellent. Yeah, when in doubt just stick to the plan, I guess. Thank you very much, Alex. That was great and, again, very useful in these quite uncertain times.
Now, wrapping up briefly in terms of the agenda for this week, probably one of the biggest focuses, at least in Europe, will be the European Central Bank meeting. The ECB is expected to lower interest rates by another 25 basis points this week. Some people were talking about 50 basis points being a possibility. It looks like 25 is much more likely, both given the rapid disinflation and slightly weaker growth momentum. But the ECB is, in any case, likely to remain data-dependent and, based on the data, maybe 50 basis points is not justifiable, at this stage.
We’re also going to keep an eye on China, of course, the follow up of the announcements that were made a few weeks ago, to see if there is continued momentum on the side of the Chinese authorities to try and really implement that stimulus plan that they have unveiled recently.
And finally, a bit more focus on the micro this week, with more earnings coming, in particular from the US, although we’re going to have a few heavyweights reporting in Europe, with the likes of LVMH or ASML.
Of course, we will be back next week to debrief all that and as usual, in the meantime, we wish you all the best in the trading week ahead.
This communication:
Any past or simulated past performance including back-testing, modelling or scenario analysis, or future projections contained in this communication is no indication as to future performance. No representation is made as to the accuracy of the assumptions made in this communication, or completeness of, any modelling, scenario analysis or back-testing. The value of any investment may also fluctuate as a result of market changes.
Barclays is a full service bank. In the normal course of offering products and services, Barclays may act in several capacities and simultaneously, giving rise to potential conflicts of interest which may impact the performance of the products.
Where information in this communication has been obtained from third party sources, we believe those sources to be reliable but we do not guarantee the information’s accuracy and you should note that it may be incomplete or condensed.
Neither Barclays nor any of its directors, officers, employees, representatives or agents, accepts any liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this communication or its contents or reliance on the information contained herein, except to the extent this would be prohibited by law or regulation. Law or regulation in certain countries may restrict the manner of distribution of this communication and the availability of the products and services, and persons who come into possession of this publication are required to inform themselves of and observe such restrictions.
You have sole responsibility for the management of your tax and legal affairs including making any applicable filings and payments and complying with any applicable laws and regulations. We have not and will not provide you with tax or legal advice and recommend that you obtain independent tax and legal advice tailored to your individual circumstances.
THIS COMMUNICATION IS PROVIDED FOR INFORMATION PURPOSES ONLY AND IS SUBJECT TO CHANGE. IT IS INDICATIVE ONLY AND IS NOT BINDING.