Halfway through the calendar year and equity markets have more than gained the losses from the sell-off at the end of last year. The S&P 500 is back at record levels despite a mixed outlook for the global economy. Indeed, currently, US corporate confidence is as low as it was in 2008, according to a report by Morgan Stanley. In contrast, consumer confidence remains high. We started the month, after a dismal May, suggesting two events could influence the performance of equities in the coming month. The first was the Federal Reserve’s meeting and how dovish a stance they would take. Secondly, the G20 meeting and the hope that thawing in the trade wars between China and America would be the result. The Fed confirmed their continued desire to maintain economic growth if possible, via monetary stimulus. As the month went on, hopes increased of a compromise between China and America. Over the weekend, Xi and Trump agreed to resume trade talks as Trump allowed that America could sell again to Huawei. The rise in equities reflected the optimism that both the Fed and the G20 meeting would have the desired outcome.
At the same time, equity markets were focussing on the Fed the bond market concentrated on the mixed economic data, particularly from the manufacturing sector. The amount of assets that now have a negative yield has hit almost 13 trillion dollars.
Michael McKenzie, writing in Saturdays Financial Times, observes that double-digit gains for bonds and equities, as has been the case for the first half of this year, is a rare occurrence. Last happening in 1995. Lower bond yields do help equity valuations, supporting the case for higher equity prices. One then must question should a sharp correction in the bond market be reflected in equities?
Geopolitical risk increased in the past month as tensions with Iran increased, leading to a rise in the oil price. At present, though equity investors seem little concerned with this. Falling bond yields have also attracted investors into gold.
Looking to the month ahead earnings will probably lead to equity sentiment. Soon we start the second quarter earnings season. A robust earnings season will be needed to underpin equity recovery. Earnings expectations for US companies for the second quarter is for a decline of 2.6% year on year, according to FactSet. Analysts are then expecting a healthy recovery of 10pct in earnings for the second half of the year. Earnings for the first quarter managed to beat analysts’ expectations, and it may well be that investors have anticipated this will be the case for the second quarter.