Global equity markets continue to climb higher in reaction to a combination of a more dovish Fed and slightly better economic data from the world’s largest economy. The Institute for Supply Management Purchasing Manager Manufacturing Survey beating expectations. The Citi economic surprise index, which measures how economic data comes in relative to expectations, has been climbing over the past weeks. Assisting the Fed ability to maintain this dovish tone, the recent input price inflation has collapsed as the NY Fed's first-quarter GDP tracker saw an upward adjustment.
Savers appear not to have trusted the recent rally as large cap US stock funds have seen substantial outflows. According to Deutsche Bank asset allocation, equities have seen consistent outflows since October as investors have sought the save haven of the bond market. This would suggest there is money waiting to be invested, currently on the side lines. It also suggests that despite a ten-year bull run it does not take too much for investors to run for the hills again.
Could Goldilocks be back in town? Are we back to benign inflation, modest growth, at least for now, and relatively loose monetary conditions? The sort of conditions that saw equities perform strongly through 2017. If one adds back into the equation the suggestion that investors have gone underweight equities as well, it could provide a healthy backdrop.
If one looks at the AAII retail investor survey, this to would suggest retail investors remain cautious. 32% of those surveyed were bullish over the next 6 months, below the historic average.
The Vix index has fallen sharply in the past few weeks, back well below 20. It is possible, after this period of extended volatility, we go back to a more benign environment. If the market believes the Fed will only act when they are sure about growth and that they are close to a neutral policy, any further rate rises could be modest. The possibility the Fed could turn more hawkish again could put something of a glass ceiling on the upside. Any downside volatility could result in the Fed reinforcing a more dovish tone. The result may be equity indexes remain in trading ranges for the year. Its just a theory.