When will equities peak, apparently just before the US economy

The second half of the Thanksgiving week is usually a bit of a non-event, however, the brief period of trading in the US on Friday saw US indices hit new highs as the Nasdaq index of technology shares continues to lead the way. Janet Yellen’s comments, along with the Federal Reserve minutes released on Wednesday, in tandem with the downbeat expectations for the UK economy presented in this week’s budget as well as the ECB minutes reaffirming their commitment to maintain their current monetary policy lead one to conclude that interest rates in the major developed economies are not moving anywhere fast. The FTSE 100 managed to eke out a modest gain, despite the pound gaining ground against the US Dollar. 

The question investors keep trying to find the answer to is how long will this bull market in equities last? As we approach the second-longest run in modern history. When are we due to get the next major correction in US equities? Macro research house Capital Economics in a piece this week suggest that historically the largest corrections occur in the run-up and during a recession. That makes complete sense, equity markets are forward-looking assets and investors look ahead to the next recession anticipate some weakening earnings and sell ahead of it. Therefore whilst the outlook for the US economy looking resilient, so should US equities. That is possibly where sentiment tends to come into the equation, investors want to know that there is more good news on the horizon. Equity market corrections can also happen when sentiment moves too far in either direction. 

This is why we and many analysts who now focus not only what the economic data is telling us, but how the market is positioned. At present, most sentiment indicators (Barron’s, AAII, Merrill Lynch, Citi euphoria) seems to lie in the band of optimism but not quite at euphoria. 
Looking to the week ahead, Americans will be heading back to their desks, and as always at the start of a new month, we get the results of the previous months Purchasing Manager surveys. This data is considered important as it is felt to be a window on the outlook for economic growth for the coming months. Global PMI's have been climbing steadily since the start of 2016, and are now reaching close to peaks from which they can roll over. 

US Tax reform will continue to be a focus as the Financial Times reports that Donald Trump is planning to meet Senate Republicans ahead of a vote on tax reform that could come as early as Thursday. The US Senate Banking Committee will hold a confirmation hearing for Jay Powell, Donald Trump’s nomination for to replace Janet Yellen as Fed Chair. Janet Yellen is also scheduled to testify on the economic outlook on Wednesday. On Wednesday, we will also see if there are any revisions to the previous estimate for growth for the US economy in the third quarter. According to Trading Economics, the market is expecting a modest upgrade from the previous estimate of 3.1%. 

OPEC is also meeting later this week where they are expected to extend the current production discipline into 2018. 
 

Posted on November 26, 2017 .