Global Markets to 4 February 2019
Wall Street’s S&P 500 Index notches up its biggest January rise since 1987.
The latest US payroll numbers surge in January, despite the government shutdown.
While fourth-quarter US corporate earning numbers are generally positive, there are some mixed messages, particularly in the technology sector.
The US bond market appears to be saying that the Federal Reserve Bank’s monetary tightening programme is nearing its end and the next easing cycle is on the horizon.
Trade talks between the US and China continue, with both Washington and Beijing giving cause to be optimistic about the outcome.
With signs that US monetary tightening is nearing an end, increased optimism regarding the trade talks and healthy corporate earnings reports, the “risk trade” is back on.
Global Market Summary
The financial markets and global investors have had to withstand a remarkable couple of months: US equities recorded their worst December performance since the 1930s and then Wall Street notched up its biggest January rise since 1987. This extraordinary turnaround in the financial outlook confirms that the worst thing that an investor can do is panic over excessive market noise. It is far wiser to focus on actual economic fundamentals – which at times can look more positive than the market is actually expressing.
The raging bull appears to have returned with the new yearand given a positive lift to global equity markets. Worth pointing out is that we are just one month away from celebrating a historical landmark: it is nearly a decade since the end of the last bear market, which bottomed out in early March 2009.
This has been one of the longest periods of economic expansion since World War II. And given the many periods of uncertainty over the past ten years, this current bull market has been remarkably resilient.
Investors are naturally becoming more wary in relation to this late-cycle period of expansion. But from an economic and global equity market perspective, things still feel rather positive, suggesting that risk assets will do well for a while longer yet. Concerns persist over central bank monetary policies, decelerating growth in China, a strong US dollar and Brexit, rendering navigation through these markets in such turbulent times somewhat scary, but still feasible.
Over the last decade, the US economy’s recovery has led the way, catalysed by the recently-elected President Donald Trump and his initial economic and corporate policies, which added a further sugar rush of fiscal stimulus. Similarly, the world’s leading global central banks adopted a number of initiatives which had an astonishing effect on financial assets. But naturally, like all fruitful strategies, there comes a time when a change in policy is needed.
However, what has become clear over recent months is that it was far easier for the central banks to implement quantitative easing and cut interest rates to zero… than it is now proving to reverse these measures. And of course, this comes at a time when the Trump Administration is engaged in delicate talks with the Chinese authorities about trade tariffs, the UK and the European Union are in the middle of Brexit and the emerging markets have been badly affected by a stronger dollar and decelerating growth in China.
At the end of last year, speculation that Fed chair Jerome Powell might further raise US interest rates created a period of panic in risk assets, which in turn led to that December flash crash. The Powell game plan was to speed up US interest rate hikes to end the expansion programme and suppress any concerns the central bank had over future rampant inflationary worries. Regrettably, he realised in early January that other forces had been doing the job for him. He has subsequently had to alter his stance and adopt a more dovish approach in relation to further rate hikes.
In fact, the US bond market now appears to be saying that the Federal Reserve Bank’s monetary tightening programme is nearing its end and the next easing cycle is on the horizon. This in itself has had a positive effect on global equity markets, resulting in a marked recovery for January.
Other positive factors include the China trade delegation’s announcement that “important progress” had been madefollowing their two-day meeting in Washington, and that they now appear to be pushing ahead to reach a deal by the 1 March deadline. It would, however, be unwise to assume that a conclusive deal will have been reached by this deadline. What is currently more important is that China-US relations appear amicable.
The continuing tit-for-tat trade tariffs have already had a significant effect on the decelerating Chinese economy, leading to Beijing implementing untested policies to prevent further weakness. In the US, on other hand, the picture looks less bleak: some 46% of companies in the S&P 500 Index have already reported reasonable 2018 fourth-quarter corporate earnings results. Indeed, 70% of these companies have reported surprise results for their earnings per share, while 62% have also reported positive revenue surprises.
There is some variation in the messages that these companies are sending out – particularly among technology and communications companies: Facebook has reported blockbuster numbers, while Amazon has reported a slowdown in retail sales growth and issued a word of caution in its guidance for the first quarter of 2019. But they did rake in £55.2 billion in sales in the final quarter of 2018, or £600 million per day.
In the UK, the stock market enjoyed a rebound in sentiment throughout January, with the FTSE 250 and AIM indices outperforming their larger brother, the FTSE 100 Index. Brexit will obviously continue to dictate the direction for sterling assets over the coming months. And given Prime Minister Theresa May’s determination to deliver on the 29 March deadline, we can expect the markets and sterling to remain volatile.
The Prime Minister has expressed her intention to return to Brussels with a “fresh mandate”, new ideas and renewed determination. But Ireland remains a stumbling block, and with little time left before the deadline, the likelihood is that a solution will not be found until the eleventh hour.
Many of the issues that haunted the financial markets in 2018 are evidently still with us today. But the likelihood of further aggressive monetary tightening from the Federal Reserve Bank appears to have diminished, the trade talks are looking a little more positive and the US economy is still in good shape, supported by last week’s surge in non-farm payroll numbers and a sharp rebound in the January Institute for Supply Management Manufacturing Index.
In the UK and Europe, concerns remain over Brexit and the Italian economy. Regarding the emerging markets, the recent dovish comments from the Fed, together with an anticipated weakening in the US dollar have directed some investor interest towards these exciting growth regions. And given their cheaper valuations compared with the likes of the US, further inflows into the region could very well continue.
Finally, as we enter the tenth year of expansion in the global economy, concerns will grow over the likelihood of a recession, higher volatility and pull-backs in equity markets will become more frequent and growth in the major developed economies might progress at a more lacklustre pace over the course of 2019.
But it is our belief that global equities will outperform most other asset classes this year, with many of those unloved regions of 2018 becoming this year’s attractions for global investors. Navigating any change in market cycle comes with numerous risks; but quality tends to prevail over the longer term, and that tends to be where the core of our investment portfolios is invested.
Peter Lowman is the Chief Investment Officer at Investment Quorum, a Director of the company and an integral member of our investment committee.
This article does not constitute specific advice and investors should bear in mind that capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority.
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