Global Markets to 08 July 2019
- As we enter the second half of the year, a review of the first six months of 2019 proves incontestably positive – the MCSI World Index records gains of 15%.
- While stock markets in China and US are leading the way, many other markets make strong gains, with the possible exception of Japan and a number of broader emerging markets.
- The S&P 500 Index posts its best first-half returns since 1997, soaring by 17.3% to reach an all-time high. And the technology-driven NASDAQ 100 Index registers an impressive gain of 21.2% over the same period.
- Global equity and bond markets rise in tandem throughout the six-month period – a rare occurrence highlighting the fact that these are extraordinary times.
- Crude oil prices rise 30% over the six-month period, pushed upwards by geopolitical tensions between the US and Iran; and in other commodities, the price of gold bullion increases as global investors look for safe-haven assets.
- US economic growth breaks records, momentum continues to drive global equity markets, volatility remains historically low and there are now signs of late-cycle conditions.
Global Market Summary
Global equity markets have been very resilient over the first half of 2019, with the MSCI World Index recording gains of just over 15%. Trade tensions between Washington and Beijing have proven no barrier to growth for the Chinese and US stock markets which have led the way, followed by the rest of the world’s equity markets.
Countless records have been broken over the last six months in numerous financial assets: equities, bonds, commodities, foreign exchange and cryptocurrencies. Geopolitical risks, political risks and the faltering global economy notwithstanding, investor appetite for capitalising on momentum and euphoria-driven markets has been unrelenting.
In the US, economic growth has been outstanding, and on Wall Street, the S&P 500 Index posted its best first-half returns since 1997, spiralling by 17.3% to reach an all-time high. Similarly, the NASDAQ 100 Index – which is heavily weighted towards the technology sector – registered phenomenal gains of 21.2% over the same period.
The global equity markets were not alone in rising over the first half of the year: bond prices also climbed. Yields, on the other hand, fell – a rare occurrence, given that equities and bonds tend to perform inversely. The world now has between US$13 trillion and US$14 trillion of sovereign debt or negative yield bonds – an extraordinary statistic.
In the commodity markets, the price of crude oil rose aggressively over the first half of the year, pushed upwards by heightened tensions between the US and Iran coupled with a decision by OPEC and its allies to extend their output production cut. But this rally has been limited over the past few days following the publication of weaker global economic data.
The markets have clearly become more momentum-driven: President Trump shares nuggets of good news from time to time, the trade talks have taken a more positive turn in recent days, the US labour market is still booming and the Federal Reserve Bank is considering interest rate cuts. All of this could be enough to ensure that the markets remain buoyant over the rest of the summer.
That said, the gains recorded so far this year are unusual and it is unlikely that the markets can continue indefinitely along this trajectory. Indeed, very few stock markets statisticians are suggesting that it might actually be possible to annualise these numbers for 2019.
However, the S&P 500 Index has indeed recorded gains of 30% in the past – in 1995 and 2013, for example. But as a general rule, when markets enjoy such a good first half of the year, they tend to pull back later on. Nevertheless, 2019 has seen many records broken…
There is no denying that it has been an incredible run – over the last 10 years, investors have enjoyed the longest equity bull market in history. Asset prices have been boosted by unusually loose monetary policy conditions and corporate profits have surged, thanks in part to a reduction in US tax rates. Furthermore, the financial markets have remained steady throughout the period, immune to global events and with below-average volatility in equities and bonds.
One therefore wonders, as the current cycle extends beyond the recently-reached historical 10-year milestone, whether or not a change in sentiment is in the offing. There has most definitely been a slowdown in economic growth in recent weeks with suggestions that the US boom is finally giving way to recession.
It is now clear that global growth peaked at the end of 2017, and with slower growth now predicted, talk of central bank intervention – either through interest rate cuts or alternative measures – is now firmly on the agenda. Keeping the global economy on track is of paramount importance and the prospect of central banks possibly easing monetary policy as we head towards 2020 is a significant change compared with this time last year – when the conversation was all about future tightening.
Trade tensions between the US and China, Brexit and uncertainties within the Eurozone all continue to dog the financial markets. This will create periods of asset price weakness and panic, but since these issues are likely to endure for many years to come, investment opportunities will undoubtedly arise from time to time.
Central bank policy could well remain loose indefinitely. History has shown us that US interest rates can remain low for extended periods, such as during the long depression of 1873 to 1879, the Great Depression of 1929 to 1939… and more recently the global financial crisis.
Muted global growth, historically low government bond yields, subdued inflation and low interest rates normally support corporate earnings growth. But the ongoing trade tariff dispute is likely to have some effect. Therefore, with traditional asset classes set to generate below-average returns over the coming years, global investors will need to be much more selective in their asset allocations. But perhaps more importantly, they will need to think carefully about the assets they own and focus on quality.
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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