Markets drift up in shortened Easter week

Market Overview:

It was a relatively quiet week for both equities and bonds, with most markets shutting early for Easter, but the US did register another new high and the FTSE 100 is closing on 8000. Investors may have been on holiday, but we did get an important inflation report out of the US, as well as more views from J Powell on Good Friday and it will be interesting to see how markets react when they open up next week. Oil firmed and Gold moved to new highs driven by central bank buying rather than any change in financial conditions as far as I can discern.

Personal Consumption Expenditures Price Index (PCE)

Last month, the Federal Reserve’s key indicator of core inflation, which excludes food and energy, rose by 0.3%, showing a cooling from January’s 0.5% increase. This marks a significant moderation compared to the past year’s trends. Meanwhile, consumer spending, adjusted for inflation, came in above expectations, helped undoubtedly by higher wages. This combination of cooling core inflation and robust consumer spending does fit nicely with the Goldilocks scenario and should offer some relief to the Federal Reserve. All things being equal, when markets open up next week it could well provide fresh impetus for markets to break higher still, we shall see.

We got to hear from Powell shortly after the report was released and he was keen to downplay the good news as he stuck to the same script as post the FOMC report the week before. Inflation is ‘pretty much in line with our expectations’ he said as he reiterated it won’t be appropriate to lower rates until officials are sure inflation is on track toward 2%, the rate they see as appropriate for a healthy economy. Separate data out Thursday showed consumer spending was revised higher the end of last year and pleasingly fourth-quarter core PCE inflation was also revised slightly lower. We also got an upward revision to Q4 GDP to 3.4%. That all seems like good news to me, as I remain convinced the primary long term driver of this bull market is going switch to be economic growth and corporate profits, not just the current focus on rate cuts.  

Chinese Upswing

It has to be said that most of the good world economic news this year has come out the US, but I am pleased to confirm there are more than glimmers of hope for the world’s second largest economy, China. Data released over the weekend, showed that for the first time since September, China’s manufacturing activity showed expansion in March, indicating signs of economic stabilization in the world’s second-largest economy. The official manufacturing PMI increased to 50.8, surpassing expectations and marking the highest reading since the previous year. Alongside, the non-manufacturing PMI also rose, reflecting confidence in future business.

China has been trying to boost domestic spending and has pledged to provide government funds to encourage consumers and businesses to replace old goods, including cars, home appliances and other equipment and these measures do seem to be kick starting a recovery. Add in a recent uptick in exports and various fiscal and monetary support measures and it increasingly looks like the economy could legitimately hit its 5% GDP growth target this year.


Now if world GDP is on an upswing and that can’t be taken total for granted but the signs are positive, then economic textbook 101 would suggest that the cyclical export companies of Europe should be particular beneficiaries.  I may be open to the accusation of ‘curve fitting’ in terms of reading only things that fit with my view, but I did stumble upon news that according to Goldman Sachs and Bank of America, investors are shifting their focus to Europe for the next phase of the global stock market rally, given the high valuations in the US market. If you take a look at the following chart over the last 20 years, you can see just how wide the gap has become, although there are tentative signs of this reversing.  

But as argued earlier, it isn’t just a valuation argument now, the interest in Europe is also fuelled by the potential for economic recovery to boost corporate profits. Europe is much more of a cyclical market, contrasting with the US market’s heavy reliance on high-valued growth stocks. A drop in short positioning also shows sentiment toward European stocks is improving, according to S&P Global. Estimated short positions on the region were cut to less than 0.2% of total market capitalization at the end of last year, the lowest level in at least a decade. And if the big US investors do start the hunt for value outside of the American powerhouse, even the UK may hit their radar as it makes European stock markets look expensive! Let’s hope so.

Still, it would take a brave fund manager to stray away from home as US exceptionalism continues. Without a shadow of doubt it is home to the companies that have proved themselves best at driving earnings consistently higher. And given the strong US economy we can expect more good news. The upcoming first-quarter earnings season, in mid-April, will start with key reports from financial giants such as JPMorgan Chase, Wells Fargo, and Citigroup. Expectations set by FactSet analysts suggest a 3.4% earnings growth for S&P 500 companies, potentially marking the third consecutive quarter of earnings expansion.. Who would bet against this group of world leading companies ….?