Panto villain to Prince Charming!

The equity bull market seems in full flow once again. The S&P 500 has rallied over 5% from its lows before Christmas. As much as Jerome Powell was seen as the villain of the equity market, last week’s speech seems to have turned into Prince Charming. It just goes to reemphasise when sentiment moves too far in one direction and emotions become consensual markets to move in the direction that causes the most pain.

To highlight this, the UK equity market appears to be taking a more optimistic view of the current Brexit situation. Stocks and sectors that had been downtrodden during the bad times, property, retail and construction are outperforming. The FTSE 250 index is starting to outperform the more internationally exposed FTSE 100. Some investors may be taking the view that the Brexit can be kicked down the Channel tunnel. The pound has been recovering modestly against the US dollar another possible sign that speculators are becoming more optimistic on an outcome.

We have had a reasonable amount of economic data this year, and so far, it suggests inflation should stay close to the Fed’s target of 2%. The underlying macro data remains mixed, however, according to the Federal Reserve Bank of New York the probability of an economic recession in the US has risen but remains close to 20%, as predicted by the yield curve.

There have been other signs of risk speculators becoming less risk-averse. The yen has lost some ground to the US dollar. The Russell 2000 outperformed the S&P 500 to name a couple. The transportation index has bounced from its lows.

As was ever thus the fall in equity prices in the last weeks of 2018 appeared to take investors by surprise, perhaps the recovery has done the same thing. If one looked back on these notes trying to glean an insight over the years, which is the primary purpose of the exercise. What conclusions could we draw? In answering that question, one probably must feel the full effects of 2008 are washed through the economic system, that remains uncertain. One must feel the euro will be as secure as the US dollar as a monetary union. Not sure that is the case. Despite a reduced reliance on oil, the price remains a significant influence on the global economy, mainly due to its implications for global inflation.

Despite the Fed’s best effort’s the global economy is possibly not “normalised”, yet anyway. The return

Posted on January 8, 2019 .