We’ve now got the numbers back for September as well as the last (third) quarter and we’ve had another good run for equities. Those of us expecting a nasty, brutish return from the summer holidays have been disappointed again, although October might yet contain some big surprise as we drive towards the US general elections.

According to analysts at index firm S&P Dow Jones, last month 42 of the 50 markets gained, the same as last month, and down from 45 the month before that. The U.S. outperformed global markets in August, as the U.S. market posted several new closing highs. Emerging markets posted a 2.53% gain after last month’s 6.46% gain and the prior month’s 7.11%, as the three-month gain was 18.36% and the year-to-date return was -1.83%.

At the Q3 level despite a slump in September, U.S. equities managed to end the quarter with gains. The S&P 500® gained 9%, while the S&P MidCap 400® and the S&P SmallCap 600® gained 5% and 3%, respectively. International markets also rose, with the S&P Developed Ex-U.S. BMI and S&P Emerging BMI up 6% and 9%, respectively.

British equities lagged in the third quarter – large British banks weighed down the S&P United Kingdom, which declined 2% this month and 5% this quarter.  By contrast Germany contributed the most positively, thanks in part to its champions in the Discretionary and Industrials sectors.

In Europe seven sectors of the S&P Europe 350 managed to end the quarter in positive territory.  Consumer Discretionary led with a gain of 8%, followed closely by Industrial and Materials, which both gained 7%.  Energy declined 18% as the prospects of a return to pre-pandemic levels of demand for fossil fuels dimmed.

According to S&P Dow Jones Tim Edwards, almost all factor indices posted gains. Quality led the way, while Momentum continued its recent dominance, with both gaining 3% in the third quarter.  Low Volatility also added 3%.  Meanwhile, Value continued to struggle: the S&P Europe 350 Enhanced Value declined 2% this quarter, leaving the beleaguered strategy down 32% year-to-date.

One last interesting stat – according to London based researchers Lalcap, India, despite having  6.3 million Covid-19 infections ( not that far behind the US’ number at 7.2 million) , the local benchmark indices the SENSEX and NIFTY are only 8% and 7% down on the year.

Back in the real world, one month or three months of stockmarket data are just numbers in the wind, interesting but ultimately pointless noise. What’s much more interesting is to look at hundreds of years data and discern huge political shifts. That’s what SocGens, Kit Jukes has been doing in the chart below via his recent macro blog entitled “Inflation is a genie held in a monetary lamp”. Jukes has been crunching BoE data showing UK inflation since 1300. Once one cleans out the noise we notice five distinct spikes in the 25-year average inflation rate, starting with a rate just under 4% in the mid-14th century. Inflation in the second half of the 18th century “came at a time when the UK was fighting wars and all over the world, much of it financed by credit”. But for Jukes the standout period is the 6 1/2% average inflation rate between 1945 and 1980.

According to Jukes this “is the period when the state become more important in the economy, when much more money was spent on health, education and welfare”. And that is the core insight – that its not really monetary policy that drives inflation, but real-world hard politics and especially decisions about government spending (and wars).  As Jukes reminds us the 1970s spike was all about politics the growth of the public sector and workers rights, all of which combined to produce higher inflation. There is an echo of these policies today in the “political refocus towards fighting inequality and injustice, rebuilding welfare and health systems, and a huge increase in public sector spending, are similarities with the post-war period” according to Jukes. “But with asset prices bloated by years of low rates, there is clearly a danger that getting inflation back under control if we do get it back, will, be even more painful this time than it was in the 1980s. At that point, countries with a history of hard money and a cultural acceptance that an inflation/devaluation spiral is fool’s gold, will be the winners in the FX market and probably in the global economy, too.”

I completely agree. Those policy makers who think that huge government borrowing, and record state spending are an entirely risk-free lunch over the medium term (by which I mean 5 to 20 years) are deluding themselves. Everything comes at a price, eventually. Part of that price must eventually be higher taxes – as Jonathan Portes and others have been arguing – but there’s a real risk that inflation will also loom ever larger. At which point the MMT brigade will make a hasty retreat and real assets will increase in value.