One should try and ride a dragon everyday

We wrote a few weeks ago that equity markets had little to get in their way, and this has proved to be the case, particularly in the US. The results season is now in full swing, and the pattern seems familiar, technology companies, particularly the likes of Microsoft continue to do well, those more exposed to economic growth, for example, MMM seem to be struggling, as it cut earnings estimates for the coming year. Is it possible, after the run, now the time for a pause to the rally?

Equity markets may need some fresh impetus to continue to climb higher. In theory one obvious catalyst for equities to trade higher is improving economic data. On Thursday the latest durable goods orders from the US came in better than expected. Even if the data improves, this could conversely have a negative or negligible impact as the equity market will have discounted this to some degree. The equity market and the economic surprise index often trend in line; this makes sense. Since the start of this year economic data and stock market performance have been diverging. It is therefore not beyond the realms of possibility that better economic data may not necessarily have a positive impact on equity sentiment.

The “market” has raised the possibility of a US rate cut in the year to greater than 50%, possible improvement in economic data may reduce those odds.

As our, soon to be erstwhile Governor of the Bank of England has been vocal in his views on Brexit it may be worth noting a piece of research from Pantheon. The first line of the report states that Brexit uncertainty appears to have little impact on the UK economy in the first quarter. They expect a quarter on quarter growth of 0.5% in the first quarter. Despite this and the fact that Brexit in its desired form, for those who voted for it, is becoming less likely, and that speculators are becoming more optimistic on the pound. The currency continues to flounder, back below 1.29 against the US dollar.

Microsoft was the latest company, after Amazon and Apple and Google, on Thursday to hit a valuation of a trillion dollars. If history is anything to go by this may be the top for a while. From the moment the other three reached the milestone these companies have given background. 

Posted on April 25, 2019 .