Looking Foreward
Also Interesting
Financial markets are discounting mechanisms, and the global equity markets are currently discounting an improvement in growth as 2019 unfolds. The global rally in 2017 correctly anticipated the improvement in growth and earnings in 2018, while the market weakness in the later part of 2018 foreshadowed the current global economic slowdown. Since late December, however, markets have begun to price in better growth in countries such as China (Shanghai Composite up 24% ytd), Europe (Stoxx Europe 600 up 13% ytd in local currency) and the U.S. (S&P 500 up 13%). Within the U.S. market, companies with high international sales are outperforming those with a domestic focus by 6% this year and global cyclicals are outperforming defensive shares by 3%. The worrying signals from the credit markets late last year have also reversed, with spreads on investment grade and high yield bonds narrowing significantly.
While we weren’t worried about the state of the credit markets, we did think investors were too optimistic about growth during 2018. The significant downgrade in optimism in the fourth quarter led us to upgrade our expectations for U.S. and emerging market growth in January. Is economic data accumulating that illustrates a growth pickup in 2019? Some evidence of improvement exists in the U.S., while the jury is still out for European and Chinese growth. The U.S. picture is hardly bulletproof, as highlighted by the weak February payroll report (job gains of just 20,000 compared to a 209,000 monthly average over the prior year). But other measures of the job market, including surveys of businesses, show more resilience. We haven’t been expecting improvements to European and Chinese growth until the second half of 2019, so the current soft data isn’t too surprising. Nevertheless, signs of stabilization will be a necessary support to the improved risk environment realized so far this year.
