It has been a volatile ride in markets. We have mainly been jumping from weeks of fears of escalation of trade conflicts and geopolitical tension to periods in which more pragmatism is expressed. Many notice that the underlying economic conditions are remarkably good. Growth is high and broad-based and unemployment rates keep trending lower.
Actually, in the developed world unemployment rates are around the lowest level seen over the last 20 years.
This tightness in labour markets is still coinciding with very moderate and steady levels of inflation, which allow central banks to normalise in a very gradual and predictable manner. This macro cocktail feeds into ongoing support of sentiment of households, corporates and investors and thereby creates a base-case outlook of stable and strong growth. The only challenge for markets is that steady is not always good enough to drive asset prices higher. Indeed, economic data releases are no longer surprising on the upside. Actually, they have started to undershoot expectations to an extent not seen in more than 1.5 years.
This is why some have started to wonder if we are at a turning point in the cycle and downside surprises could be an omen of actual slowing in growth or even an upcoming recession over time. We feel however it is too early to bet on such a scenario. Basically, the real show stoppers for the business cycle are hard to see emerging during the rest of the year. Labour markets are not overheating yet, central banks are not yet behind the curve (look at inflation), investment spending is not excessive, profits are good and corporate leverage is not excessive either (in a broad-based manner).
Meanwhile, political noise is more confusing than directional, but it does always carry a risk of unintended escalation and negative feedback loops into the economy and markets. However, both the trade war (with China) worries and the actual war (with Syria/Russia) fears calmed down somewhat by more balanced and cooperative actions from the US government. The missile strikes on Syria were executed in cooperation with traditional allies the UK and France and got official support from NATO. Also on trade matters there were words of appreciation by the US for China’s constructive attitude on opening up its economy and discussions on future trade relations. On top of that, Trump even floated the idea of the US re-joining the Trans-Pacific Partnership (TPP), while constructive talk was heard about a possible new NAFTA deal after a meeting between US Vice President Pence and Canadian President Trudeau in Peru.
Furthermore, investor behaviour is shifting a bit. Still, no clear buy or sell signals from our overall behavioural analysis as very mixed signals emerge today in our toolkit. A further weakening in sentiment indicators is seen, like the US bull-bear survey or the NN IP Big Data sentiment metrics from professional news sources and social media sources. On the latter it is noteworthy that “emotion” in global equity markets as expressed in these news sources has now dropped to the lowest level since February 2009 for professional news and to the weakest level since just before the Trump election for social media news.
All together the outlook for global markets is a bit of a balancing act between lots of underlying cross-currents. Broad-based support in underlying fundamentals seems unlikely to shift down materially during the rest of the year, but the additional change for the better that can lift markets to an even higher level is hard to see as well at this stage. Policy and politics are not providing clear direction either, as the gradual normalisation path of central banks is well understood and priced by markets, fiscal policy news is played out and (geo-)political drama over multiple domestic and international matters is mainly erratic and unclear rather than anything else.
This causes us to be balanced in most asset class choices. We wait and see for now, but will be back with renewed conviction when opportunities arise!