In this week’s earlier blog, we discussed the influence central banks can have on economic cycles and how this in turn influences stock prices. On Wednesday evening the minutes of the last meeting of the Federal Reserve were released, those hoping for a more dovish stance may have been disappointed. The consensual view from the minutes was that the Fed will remain on hold for the foreseeable future. Possibly rather optimistically the minutes expressed the panels view that fears to global growth and trade had moderated. Not sure if that would still be there view today, as this meeting was held before negotiations took a turn for the worse. Although inflation had dipped below their target of 2% the panel felt this could be transitory. Indeed, they moved up their longer-term inflation expectations. There has been an uptick in the recent data coming out of the US economy however today the US Manufacturing PMI fell to 50.6. Suggesting the US manufacturing is almost in contraction.
While rustling through old research notes, we happened upon a report from the highly regarded Bank Credit Analyst or as it is better known BCA research. The title “Timing the next bear market”. This report, written in January 2014. The opening line refers to the appropriateness of assessing the likelihood of the end to the US equity rally.
A rollercoaster week for equity markets as the uncertainty around trade talks with China continues to dominate sentiment. The week started badly as US leading equity indexes lost 2.4%, then spent the next three days clawing those losses back. Friday in comparison was more muted, leading to a modest gain on the week overall. Bonds remain well bid as the uncertainties around trade continue.
We may have felt a little premature on Monday morning suggesting that equity investors had enough of the fear factor instilled by the faltering trade talks, in the previous week, to allow equity markets to rally. However, since the further selloff on Monday and after the US equity market had reached almost 2800, a correction of around 6%. Equity investors have gathered their poise, and US equities are in line for their first three-day consecutive rise. Some of the recent economic data may have added some encouragement. The Philadelphia Fed Index came in above expectations. The index is a regional federal-reserve-bank index measuring changes in business growth, also known as the business outlook survey. There is some correlation between the index and the ISM readings. This would point to a recovery in the manufacturing index in the coming months. New home sales and jobless claims also appeared encouraging. Earnings from Cisco and Walmart aiding sentiment.
The retaliation by the Chinese to Donald Trump imposing the tariff hikes rattled equity markets on Monday. Major US indexes losing over 2% in the days trading. We expressed the view that a correction of circa 6%, taking the S&P 500 back to 2800 was probably in order after the sharp rise from the start of the year. The fall on Monday took us back to that level. The S&P 500 is only now marginally higher than where it was a year ago. Higher tariffs can have the dual effect of pushing up prices and lowering growth, not a helpful combination for any economy.