Since the last market commentary in September there has been remarkable calm across financial markets, even if this hasn’t been matched in the political sphere, here or across the pond.
Historically, the Autumn has often been a time of extreme falls, but not in 2025, despite a vulnerability which can be argued to be unique in financial history. Why?
The US government closed for more than 40 days, and there are some signs that the US economy has ground to a halt. One AI leader (Sam Altman) apparently talked of the need for the US government to bail out his firm one day. The response of US markets was muted at worst. The reason is overconfidence and complacency which has become entrenched over years.
“Stability leads to instability” said Hyman Minsky. He believed markets were by their very nature unstable precisely because human nature is on so predictable a journey. Stability leads to increased confidence, which gathers momentum, and breeds overconfidence, and triggers instability. Over confident and greedy investors and borrowers believe the good times will continue indefinitely… then it all comes crashing down.
He set this out in 1982, in the wake of the 1960s and 1970s boom and nasty bust. You can only ignore his point if you believe that human nature has changed OR you believe “this time is different”, the four most dangerous words when investing.
Nonetheless, Trump may yet blow the US bubble to even greater extremes. The wealthy are doing incredibly well under this President. The poor are not, and there are more of them. With the Mid Term elections in November 2026, Trump only has a few months to try and regain ground lost because of the higher costs and loss of confidence hitting “ordinary folk” and small businesses.
He has a number of options. Helicopter cash to the poor? (not literally). Introduce price controls on, say, pharmaceuticals and food? Force the Federal Reserve to cut interest rates? It’s guesswork right now, as is how the markets might respond. For Trump, the next few months are a political tightrope walk with no safety net.
More positively, as we look into 2026 much of the rest of the world is in a more conventional expansionary mode, with an expectation of falling interest rates and wide-ranging reform. This might release pent-up demand from both companies and consumers who have been hesitant to make spending decisions in 2025, shaken by Trump tariffs and political uncertainty, in the US, UK, and further afield.
The UK is a case in point. Stock market valuations are modest at worst, and much is cheap. Interest rates could be under 3% by end 2026 – the poor economic growth will help this trend, similarly if UK inflation has peaked. This has been sufficient to encourage institutions, domestic and global, to buy the FTSE 100 index, up 18% year to date. But this has not yet stretched to more domestically-focussed companies, those which inhabit the FTSE 250 and Small Cap indices (up just 5% and 2% respectively in 2025).
The Budget was not helpful in this regard. There was an emphasis on doling out more money, taxing those of us who work (and retirees) to pay for it, and nothing to stimulate desperately needed growth.
Supply-side reforms would have been welcome news. Such as reducing paperwork and regulation (e.g. for hiring or planning permission), tax incentives, infrastructure spending to make it easier to do business, improving capital availability.
The Budget increased some public investment, added to planning reforms, and introduced localised “growth zones”. A new 40% first year allowance for qualifying plant and machinery is helpful. But these and other adjustments are simply not going to move the needle, not in scale. Even by the governments own estimates, after 10 years these might lift total GDP by just 0.6%. This is not good enough, and it will have no bearing on the hit to business confidence in recent months directly attributable to Budget uncertainty.
In the next 6-12 months there is a huge test for the government, to see if it grasps the nettle on supply-side reform, and starts to unlock productivity and boost business confidence. The UK’s challenge is not a lack of potential, but a messy political environment that makes execution difficult.
Yet if the reform agenda remains murky, the other two pillars supporting the attractions of the UK stock market remain firmly intact – cheap valuations and the prospect of much lower interest rates than is currently reflected in markets. Counter-intuitively, a big part of the UKs attraction for global investors is that it is dull! The latest “exciting” new listing was Princes, well known to all of you tinned tuna and sardine lovers.
Therefore, putting the political mess to one side, the UK as an investment destination has attractions. In fact there are a variety of alternatives for global investors who are increasingly inclined to the ABA strategy – anything but America – the result being that, for the first time in years, most world stock markets, including the UK, have generated better returns than the over-exposed US.
Looking into 2026, much of Japan remains cheap, China has an array of opportunities as their government stimulates consumer demand, smaller companies around the world are good value, as are commodity companies (from gold to oil).
Calm, complacency, boom? If Trump does trigger an even bigger economic boom and stock market bubble in the US, this will create a benign background for all of these other opportunities to blossom, including the UK.
But if the “boom” you hear is Trump blowing up US financial markets, it could get ugly. We have a defence in place across all portfolios, ready to deploy if and when required.
Last but not least, there are a raft of financial planning issues which have arisen over the last year, notably around capital gains tax and inheritance tax. Do stay in touch if these are relevant to you, and have a look at our recent blogs on these issues.
