In years gone by when writing these blogs, we used to talk about bad news is good news for the stock market. Papers would write in disbelief as the stock market rose despite fears on many fronts. Lack of growth fears Greece would break the euro, were but two. Valuation of equity markets was another fear. We talked about a wall of fear that equities climb. As the S&P 500 is currently experiencing its worst December since 1931, we live through times when bad news is bad for the stock market and even good news is greeted with a degree of caution as it causes markets to believe the Federal Reserve will become more aggressive with its tightening policy. This is despite valuations looking more attractive.
Therein lies the problem, previously the bad news would stimulate the Fed to further quantitative easing for asset prices higher as the money looked for resting places. Now we live in a time when the Federal Reserve is looking to withdraw liquidity from the system.
We have been of the view the Federal Reserve like most other global central banks are keen not to derail an economic recovery that appears to have taken an age to finally found a solid footing. The Federal Reserve probably remains in that camp. They have however risked such an outcome as they have stepped up the pace of monetary policy tightening.
It is probably fair to say Brexit is not helping sentiment towards global equity markets, Switzerland lowered its growth expectations on European uncertainties. Brexit has been compared to a divorce. Often when divorces can’t be agreed between the lawyers and the two parties a mediator is brought into the situation. Perhaps that is what needed to happen in this situation to resolve the impasse. A no deal Brexit helps no one.
The one piece of good news, the oil price keeps falling. The global economy may be less reliant on oil than it used to be however it is still important to the global economy. Recessions don’t tend to occur when the oil price is low as it reduces inflationary pressures and improves the consumer liquidity.
As equities fall on point of euphoria, the rise can only start at the point of capitulation. December’s fund manager survey from Merrill Lynch, in their opinion, suggests we are getting closer to that point but may not be quite there yet.