Despite the continued weakness around the globe in Manufacturing data as JP Morgan’s global PMI is now below 50, indicating that global manufacturing is contracting. Prompting headlines in the business pages that America is now on recession watch. As well as this weakness in the so-called FAANG stocks, entering bear market territory, as defined by more than a 20pct fall from a peak, equity markets held their nerve on Monday.
One measure we use of risk appetite, the Vix index, appears to remain remarkably sanguine about the outlook for equity markets, trading around 17, below the historical average. In contrast, the MOVE index, the treasury market equivalent has risen sharply. It does not always follow where bond volatility goes, equity follows, but worth keeping an eye on.
We started the week suggesting the two most important events in the coming month will be the Fed meeting on the 18th of June and the G20 meeting later in the month. We have often expressed the view in this commentary that the rhetoric from central bankers suggests they want to keep the economic growth on track, as the calls for the Fed to cut rates in June grows louder. Jerome Powell speaking on Tuesday in Chicago seemed to reinforce this view. The Fed was “closely monitoring” the implications of the trade wars and will “act as appropriate to maintain the expansion”. Is this the Fed rising above the hilltops and riding to the rescue once again? Appearing to be all the investors needed to hear as US equities rose sharply on Tuesday.
Equity markets are supposed to die in a sea of euphoria and rise from the depths of fear. The fund flow data suggests that, should this be the final hurrah for a ten-year expansion to the US economy, this equity market could well be one of the first to fall into the sea of despair. Equity fund outflows in the last six months are the largest on record, according to Deutsche Research (in dollar terms) as investors have fled to bonds.
Finally, star fund manager Neil Woodfords fall from grace continues as he was forced, due to increases in redemptions from his funds, to introduce a gate, preventing further fund withdraws. Without wishing to comment on the performance itself, I think it is a timely reminder on those lessons we can learn as investors. According to press reports, Mr Woodford has been forced to sell the more attractive investments to provide liquidity to investors looking to cash out. If this is correct, it must lower the quality of the remaining portfolio. Even experienced fund managers can get it wrong; many funds were forced during 2007 to introduce gates to prevent outflows. One lesson be wary of funds that offer daily liquidity and have holdings in many illiquid securities. Many retail investors probably bought in Mr Woodfords income fund on the back of the press love affair with the star man. Another lesson make sure when investing, you do the homework and understand the risks.