Equities in Europe had a good day as Mario Draghi at the monthly ECB post rate announcement press conference, dangled the carrot of the possibility of more monetary stimulus. Equity prices in the US followed the lead and started the day in a robust fashion, but tailed off as the day went on. Asian markets finished the week on a negative note. Equities in Europe, on the back of the lack of follow through in the US and Asia, are starting the day giving up some of yesterday's gains.
What investors will want to see now is a period of stability in asset prices, the price of oil jumping 30% from its lows and then giving a third of it back does not inspire confidence. Swings of 2% a day in equity markets again does not encourage traders and investors to make many new decisions. So far this year, bond and equity investors have lost money, those people holding cash have had the best outcome. It is 25 years since cash outperformed both bonds and equities. The weekly AAII retail investor survey has the bulls, bears and those who are neutral evenly split, which indicates how unsure investors are of the direction of equities in the coming months. The FTSE 100 did appear this week to be bouncing of higher lows, which chartists may consider a positive sign.
It is quite likely equity prices will continue to be volatile into the rate announcement in a couple of week’s time, as markets hate uncertainty. It is our belief that should the Federal Reserve stick to their guns and start the process of normalisation of rates, this will take away some of the uncertainty. This could send the signal to markets that the Fed are confident in the strength of the US economy and contra to what some analysts expect, may well lead to an equity market rally. Another piece of evidence to suggest an underlying strength in the economy, the US trade deficit fell in July to its lowest level in five months as exports rose broadly.
Later today is the release of what may be for the the last piece of the jigsaw for the Federal Reserve ahead of the September meeting, The release average hourly earnings and non-farm pay rolls. Expectations are for just over another 200,000 jobs to be created in the month of August. This figure would be consistent with the monthly average this year; expectations are for hourly earnings to rise modestly.
We have often stated that we believe this has been one of the most unloved equity bull markets. This period of volatility has added to the lack of love. Now that price earnings multiples have fallen in this recent correction, and are now closer to traditional multiples. Earnings expectations for the next quarter are fairly muted; this should make meeting these expectations easier to meet. Once the uncertainty of what the Fed will do is out of the way investors will hope for a rally into the year-end.