Investment Outlook for April 2019
Last month investors enjoyed the continuation of recent upward trends in world stock markets: the S&P 500 rose by 1.5%, the NASDAQ by 2% and the Euro Stoxx50 index by 1%. One of this years’ star performer amongst major indices, the Shanghai Composite index added to its positive run with +2.1%. Has the time come for a word of caution? As most seasoned investors know, markets do not increase in a “straight line” and even in a highly favourable trading environment one can observe periods of consolidation. Not surprisingly, a headline in The Wall Street Journal of Monday March 25 read as follows: “Stock market rally trips on Global Growth Fears”. Not for the first time, anxiety regarding economic growth is leading some traders towards bearish market assessments. For observers willing to study economic data in more detail the recent statements by monetary authorities represent more of a cautious view of technical trading conditions in the immediate future than a bleak structural assessment of the global economy.
Market participants can be forgiven, however, for wondering what the immediate future could look like. It is clear that (almost by definition) earnings growth, although high by historic standards, is on a decelerating growth path (due to the importance of the so-called “base effect” when calculating growth numbers). Continued favourable performance of equities seems to require (a combination of) a resolution to the trade dispute between China and the US and a continued favourable earnings tren0d. The resolution of the trade dispute is outside the scope of this analysis but an investment stance that focuses on visible and credible growth stands out as offering a relatively attractive investment strategy now that the sell-off in equities at the end of last year has moved into the rear view mirror.
It goes without saying that, in light of some uncertainty regarding the global economic outlook, market participants were eagerly awaiting the outcome of the Federal Open Market Committee meeting on March 20. Their statement was, in the end, surprisingly dovish and reads as follows: ”In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.”
Recent global economic data might have possibly forced the hand of the Fed with respect to its ambition to normalise monetary policy (and raise interest rates if economic trends were to require such action). The Fed’s action is not dissimilar to what the ECB announced and one could wonder if the ECB is reverting to the old Bundesbank approach where monetary growth was based on an estimated growth path in money demand related to (nominal) GDP growth. Some European countries have a highly developed ability to pick up any change in the “wind direction” regarding political tolerance of government intervention: in this light it does not come as a surprise that Greece and Spain raised minimum wages recently. (Spaniards have indeed something to celebrate: on December 21st the Spanish Council of Ministers approved the largest increase in the minimum wage since 1977).
Interestingly, volatility in a number of financial markets (for instance European equities) actually increased in the immediate aftermath of the Fed meeting; as one observer stated: “In fact, the more the central bank says it will help, the more it may hurt confidence” (CNBC on Monday March 25 in its morning comment). One can conclude that possibly an unnecessary dose of uncertainty with respect to global economic trends has been injected in equity markets due to somewhat erratic turns in monetary policies. Policy makers, it seems, are currently executing a difficult balancing act between steering the economy towards its full growth potential without embarking on, what could be interpreted as, crisis management.
Meanwhile, global corporates remain, on the whole, confident. For instance, Apple CEO Tim Cook said on March 23 that he is "extremely bullish" about the global economy based on the amount of innovation underway, and urged China to continue to "open up" amid complaints from the U.S. and others that it is shutting foreign firms out of key high-tech industries. In a speech at an economic forum in Beijing, Cook said that Apple is less concerned with the short-term economic outlook because the tech giant makes investments looking ahead years or decades.
Jacob Frenkel (chariman of JP Morgan Chase International) summarized the more optimistic view of recent actions by central banks around the world as follows: “the assessment of the robustness of the economy has been modified: this is a short-term phenomena and the FED action has not been a policy U-turn”.
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