Equity markets, particularly those in the US had another solid week, the third in a row. We questioned a few weeks ago if we were back to the days of bad economic news being good news for equity markets, as it would further encourage the Federal Reserve not to raise interest rates. If the past week is any indication this may be the case as disappointing retail sales and industrial production data falling for the first time in 8 months, did not deter investors. Likewise, disappointing outlooks from Deere and Coca Cola seemed to have limited impact. The market did get some encouragement regarding US-China trade talks. The S&P 500 has now risen almost 11pct this year. As the year started sentiment indicators were in fear territory, they are now moving much closer to greed. Valuations looked cheap at the start of the year, and the S&P 500 currently trades on 16x after this year’s rise, closer to historical averages.
A lot of the recovery in equity prices has been due to changes in central bank sentiment as economic data weakened around the globe. The latest came from the German economy, as the economy reported no growth in the final quarter of 2018. The only piece of good news was that Germany did at least avoid going into technical recession. There was some press speculation the recent weak economic data may result in further stimulus measures from the ECB.
The coming week is a short one for US equities as markets are closed on Monday for George Washington Day. This does not mean we will be short of talking points. China trade talks continue this week; optimism has been rising that a deal is close; a setback could have a negative impact. The main event of the week will be the release of the Federal Reserve minutes from their January meeting. We may get more sense from the discussion whether the Fed intends to lead the market to believe the tightening cycle is over. We also get several Fed members, including St Louis Fed Chairman Jim Bullard, speaking this week. Durable goods orders and housebuilding data will also be of interest.
Warren Buffet releases his annual report and letter to shareholders. In this, he can give some insights into his current investment thoughts.
For the UK economy, the Office for National Statistics publishes its latest wage growth data. Wages are expected to grow by 3.5% in the fourth quarter. This could fuel inflation concerns at a time when the UK economy, like many others, records anaemic growth.