Market Commentary - April 2019
21st June 2019
After the steep falls experienced in the final quarter of 2018, equity markets rallied sharply in the first 3 months of this year: the MSCI World Index recorded the second strongest quarter on record, rising 11.6% in dollar terms. There were many reasons why equity markets had fallen precipitously late last year, with December registering as the worst month since 1988, but none were new. The Federal Reserve Chairman Jerome Powell’s comments that “interest rates are far from neutral” (and therefore needed to rise), investors struggling with the likely outcome of trade talks between China and the US, the economic slowdown in China, and some weakness in popular technology shares all contributed to the sell-off.
The majority of the strong first quarter returns occurred in January, as Chairman Powell backpedalled on his earlier observations and a January press release stated that “the (Federal Reserve) Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate...” This significant change in monetary policy expectations was sufficient to soothe investors’ nerves and markets rebounded from their oversold positions. Lower interest rates for longer should be supportive of the continued slow expansion of the US economy.
Alongside the supportive monetary conditions, unemployment rates are low by historical standards, which is causing wages to rise gradually. Consequently, the consumer is in good shape. Since the global financial crisis, consumer spending has been more restrained (with a higher savings rate) and household balance sheets are not excessive. Looking to company earnings, management teams have largely been prudent in their forward guidance as GDP growth has slowed, but revenues – importantly – are still growing, which is perhaps the reason investor sentiment has rebounded somewhat since the turn of the year.
We are undeniably in the latter part of the business cycle and one should expect more volatility. On balance, there is sufficient ‘good news’ out there to support continued investment in equities and certain regions even look attractive. China is showing positive signs, with fiscal stimulus helping consumers spend more and concerns around slowing growth levels appearing to be overdone. The US dollar, which is very highly valued relative to history, could weaken as the Fed pauses for breath and any weakness should be a meaningful tailwind to Emerging Markets as a whole.
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