The path forward for equity markets will be dictated by a number of cross currents that we are well prepared for. April is a seasonally strong month for equities, historically the best performer in any given year.
The highly publicised (and over-analysed) US yield curve flattening process, and subsequent inversion between 10-year bonds and three-month treasuries, has likely played on the minds of investors. Despite its reliability over time as an indicator of recession, the inversion’s transience (< 24 hours) has ushered in dismissals of its validity from all corners rather quickly!
Irrespective of the debate about the onset of recession, remember equity markets customarily enjoy robust trading in the aftermath of an inversion. The inversion that occurred in September 1998 saw the market peak in March 2000 and the one in January 2006 saw the market top in November 2007 (before the GFC cataclysm). Both enjoyed substantial lead-up rallies.
Despite the outsized rally in stocks, equity risk premiums (4.8% in the US and 7.4% in Australia) continue to convincingly support the case for equities over bonds. A substantial margin of safety exists here for investors.
Further, the Fed’s late March change of heart saw the nine-member committee decide to play it safe – no rate hikes in 2019 (previously two expected) and one in 2020, with further balance sheet run-off to stop by September 2019. This is unequivocally supportive of equities.
In China, an EGG analyst reported sightings of economic ‘green shoots’ in response to fiscal and monetary accommodation from the central government and its instrumentalities. There is a growing confidence that a US-Sino trade deal is at an advanced stage and likely to be consummated pre-June 30, but there is the risk that it underwhelms given heightened expectations.
The Shanghai Composite Index has been a significant outperformer through 2019, correctly anticipating an improving outlook for the China economy.
Offsetting these developments, US corporates are currently reporting their Q1 earnings. Companies will be cycling a challenging comparative period and also a three-month period of restrained economic activity.
Outlook commentaries will be closely scrutinised for clues on how the US profit cycle is shaping up for 2019, where expectations range from 0-6% profit growth versus ~22% booked in 2018.
The first major US IPO of the calendar year, ridesharing provider, Lyft Inc, disappointed all by finishing its first week of trade down 20%. Uber is not far away, nor is Pinterest and AirBNB among others prepping for IPO. A series of high-profile but poorly performing floats would not be helpful to market sentiment.
The looming Federal election and change of stewardship will generate headlines but do little to derail a local stock market that is intent on tracking higher. It is, however, important that Wall Street’s September 2018 highs do not curtail the vigorous but maturing US secular bull market.