In calm waters the skipper needs to be even more vigilant

Improving Chinese economic data, as highlighted by the latest Citi economic surprise index, alongside a fledgeling US earnings season that offers encouragement, supporting equity prices. At the start of the week, we highlighted that Johnson and Johnson reported earnings that missed expectations last quarter. This quarter Johnson and Johnson announced results that saw first-quarter profits drop 14% from this time last year, however, this was better than the market had anticipated, and the shares rose. Demonstrating that the market will react better when expectations are lowered ahead of time, and it is fair to say that expectations have been reduced across the board into this earnings season.

The most recent US economic data reports that in the form of the New York Fed’s Manufacturing Index was stronger than expected as the new orders index has stabilised. At the same time, input pricing has moderated. The not so encouraging news is that future business activity has been declining, where that index goes historically, the stock market tends to follow.

After this strong run from the start of the year, are equity markets getting ahead of themselves? Cyclical sectors have been outperforming defensive sectors from the beginning of the year to a point now where they suggest equity markets are due a correction. Another possible signal equity markets in America could be due a setback as the Russel 2000 index of smaller companies, after a strong performance from the start of the year, is now underperforming the larger S&P 500. Likewise, consumer staples are starting to outperform the discretionary sector. The metal and mining index, another possible bellwether of economic activity, has fallen over 4% in the past week.

At present there seems little on the horizon to disturb sentiment. However, we all know that this is often the time to be on one’s guard. Easter is coming, and so we will be taking a break from these blogs for a few days. Frankinvestments will be appearing once again on Thursday morning on IG TV with Victoria Scholar.

Posted on April 16, 2019 .