As the Dow hits another record high and filing through the collection of commentary one sees, the outlook for equities remains as clear as mud. Many market commentators continue to focus on the excess valuation of equity markets (mainly the US one) along with the expectation that the Federal Reserve will look to reduce their balance sheet starting in September, effectively tightening monetary policy by another method. The continued weakness of the dollar and strength of the euro is another area of concern for some. Geo political risk remains real as North Korea continues to test the will of Donald Trump. There is also the possibility that America will introduce further sanctions against Russia. The longevity of the equity rally is often quoted as another reason for caution. Volatility for equity indexes may remain subdued however volatility within sectors and individual stocks seem to appear rising. With Amazon now up 40% this year one is getting a small sense that we may be re-entering the year 2000 again when tech stocks were chased and the less fashionable ignored.
Those commentators with possibly slightly more rose-tinted glasses point that the earnings yield gap for the MSCI All World Index still make equities more attractive compared to bonds. However, this is mainly due to bond yields remaining excessively low compared to history. Earnings growth remains robust, inflation subdued and no-one forecasting an economic recession. However, a word of caution in that regard, as we pointed out last week, economic forecasters rarely manage to predict an economic recession. The Vix index remains close to historic lows, although we did have a mid-week bounce above 11 before settling down towards the end of the week.
Equity sentiment, the lack of which has been noticeable for a lot of this market rally may be on the turn as active equity funds see the biggest inflows since 2014. In contrast, the AAII weekly investor survey records that US retail investors bullish sentiment remains below historic average.
Last week we received the latest estimates for second quarter growth for the UK and US economies. The UK economy grew by 0.3% quarter on quarter, slightly ahead of expectations. The US economy grew an annualised 2.6%. This was a faster growth rate than in the first quarter, and in line with expectations.
Looking to this week it is another one that will keep investors close to their computers, as earnings and macro data remain in focus with the likes of Apple reporting. On Tuesday, we get manufacturing Purchasing Manager Index surveys for much of Europe including the UK. We also get the preliminary Q2 estimate for economic growth in the euro zone overall.
Also, this week the Bank of England meet on Thursday to make their latest interest rate decision. At the previous month’s meeting the voting, 5-3 in favour of keeping rates where they are, being closer than experts expected. A move to increase interest rates this week would take equity and bond investors by surprise, particularly after the recent weaker inflation data.
As for the US Friday’s jobless report will probably be the focus point of the week. Last Friday, we saw that despite employment rates remaining tight, wages cooled in the second quarter.