During 2016 market sentiment has rapidly shifted from a pessimistic outlook based around views of deflation, stagnation and weak recovery to highly optimistic expectations of growth acceleration driven by fiscal policy and infrastructure investment.
Bond markets have seen significant capital declines and corresponding material increases in yields in the last 3 months. Sovereign debt in particular continued to deteriorate and this is reflected in the data for the FTSE Actuaries UK Conventional Gilts All Stocks index, which has declined over 7% in the last 3 months. This centres upon concerns interest rates and inflation will increase in the coming year and quantitative easing operations will be tapered to make way for fiscal spending.
Donald Trump’s victory in the US Presidential Election has undoubtedly had an impact on market sentiment, with expectations centring on the idea that his policies will be reflationary. There is no certainty surrounding the actual form the policies will take, creating the risk of disappointment. All 4 major US equity indices hit new highs in the last month and the S&P 500 returned 3.62% in US Dollar terms in November. The pound strengthened against the US Dollar towards the end of the month and so 1-month returns for the S&P 500 were 1.25% in Sterling terms.