Italian two-year debt is the latest to offer a negative yield. You now pay the Italian government to lend them money. Should an economist land from another planet, trying to explain this would prove impossible. The bond market and the equity market continue to operate on the same data but somehow coming to different conclusions. Fixed income assets are reacting to weaker economic data, the equity market on the idea that this low volatility Goldilocks world we have lived in is set to continue. The bad news good news investment philosophy. The worse the news the more interest rates will fall the more attractive equities become.
Manufacturing PMI’s have been falling for 14 consecutive months, as illustrated by the chart below. Global Manufacturing, according to the Latest JP Morgan data is in contraction. We have reproduced this chart from the Wall Street Journals Daily Shot research piece. The chart describes how manufacturing growth follows bond yields. The fall in yields we have had should boost manufacturing once again.
We often discuss equity sentiment as a trigger for corrections and recoveries. Stock markets rise when all seems lost and fall when the outlook appears rosy. One possible indicator of sentiment could be the aggregated futures US futures positions. The chart suggests assets managers are currently are about as optimistic as they get
Equity fund managers bullish, bonds bearish, which one is right? The upcoming earnings season could be one event will influence investor sentiment. Analysts have been downgrading earnings expectations on the back of the weaker data. In March year on year expectations were for flat earnings growth it is now for a decline of between 2.5 and 3%.
Whilst inflation remains where it is central banks can maintain the fiscal stimulus. After the 19 pct rally in stocks so far this year a Barron’s article points that apparently when stocks have an above average first half the market is 60% more likely to rise in the second half than it is in the second half of other years. The average return for the S&P 500 for the last 87 years, excluding dividends, is about 8%. That statistic alone encourages one to believe the risk in investing in blue chips for the long term is well rewarded, whether or not the Barron’s article proves right this year..