What has happened in the financial markets since the need of the 4th Quarter 2018 until the end of April maybe another emotional run which we, as level-headed investors, should not heed. We should view it for its entertainment value but not let it become a nerve-wracking experience. The massive correction which ended on Christmas Eve was followed by an equally spectacular rebound this year. It is hard to determine any hard facts for these strong movements except fear and greed.
The US economy did not get off to a good start in 2019: a government shutdown, a shaky stock-market and concerns that the Federal Reserve would tighten monetary policy too quickly made for a dim outlook for 2019. With the effects of fiscal stimulus fading, and momentum in the global economy ebbing, most expected America’s economic growth to decelerate.
Instead, the GDP figures for the first quarter, published on April 26th, were a pleasant surprise. Economists had been expecting annualized real growth for the quarter of 2.5%. Instead, they were treated to a figure of 3.2%.
What stands out and could be perhaps more consequential than the eye-catching growth figure was unexpectedly weak inflation, which could suggest an underlying weakness in demand. Annualized quarterly growth in prices, as measured by personal-consumption expenditures, was just 0.6%, or 1.3% when excluding (volatile) energy and food. This sting in the tail is probably why government bond yields, which rose on news of the cheering GDP figure, then fell sharply.
Although all GDP figures are preliminary estimates, which will be revised at least twice in the coming months, the financial markets liked what they heard. The markets were content to focus on other positive news. The protectionist rhetoric appeared to soften, and the oil price rallied strongly on demand dynamics and tensions in the Middle East. Eurozone equities saw positive returns, led by the energy sector. The FTSE All-Share index rose as sterling weakened and expectations of an imminent UK rate hike fell after some disappointing economic data. Emerging markets equities posted a slightly negative return. US dollar strength was a headwind. US Treasury yields resumed an upwards path and corporate bonds declined but outperformed government bonds.
Against this backdrop three reasons stand out for an improving equity market:
Analysists who had written down sharply earnings estimates for 2019 appear to be holding off on negative revision and instead point at a sharp increase in earnings in 2020.
The U.S. Federal Reserve is on hold and may be adopting a more dovish approach to inflation targeting.
China finally seems to be moving to reflate its economy in earnest.
Last year’s Halloween scare has been overdone. The positive views on 2020 may also be overdone and subject to revision when the market sentiment sours, which it will at some stage.
What is the level-headed investor to do in such an environment?
Invest in the market, shut out the noise, stay invested and take a long-term view.
Remember that investing is like caring for your orchard. It takes time and a steady hand.