Global equities pushed higher last week with Japan’s Nikkei Index leading the way gaining 4.3% (-7.0% YTD). European stocks increased by 1.5%, while China declined by 3%. In the U.S., the S&P 500 appreciated by 0.5%, but investors favored Value stocks (+1.6%) over Growth stocks (-0.4%) by a wide margin, as some of the stocks darlings from last year missed Q1 earnings estimates. Examples include Google/Alphabet (-5.4% on Friday, after rising 47% in 2015) and Microsoft (down 7% on Friday, but up 23% in 2015). Elsewhere, high yield bond prices continued to exhibit a strong correlation to the price of oil. Since reaching a high yield of 8.4% (as measured by the CSI Barclays Index) in February (when oil prices bottomed at $26 per barrel), high yield bonds have rallied in concert with oil and now yield “only” 5.7%. On that note, WTI Crude gained 8.3% last week and now trades at $43.73 per barrel.
Detailed asset class return data is available here.
Treading Water: The S&P 500 has been trading in a wide range for the last 18 months, marked by about 2130 on the high end and 1800 on the low end. Over this time frame the lows and the highs of this 15% range have been tested multiple times, but it has yet to breakout in either direction. Last week’s performance pushed the S&P 500 over 2100 for the first time this year, but the question remains can the market reach ever higher levels? The short-term answer will come from the first quarter corporate earnings results which are being reported over the next couple of weeks. With management teams having guided expectations lower over the last several months, earnings are likely to “beat” sell-side analysts’ estimates in the aggregate – if they don’t, we could be revisiting the bottom-end of the trading range soon.
Sources: Bloomberg and Covenant Investment Research
In the intermediate term however, the market direction will be determined by actual and expected monetary policy actions by central banks. For better or for worse, this is the world we live in now – one large central bank trade. Central bankers have engineered an impressive rally since 2009 that absent some noise in 2011, was largely uninterrupted until 2014 as markets responded positively to wave after wave of ever-inventive policies designed to push liquidity into their respective economies. Yet, since the end of 2014 investors’ reactions to policy actions have been less predictable and global equity markets have lost their momentum. Are we at the end of the era of Central Banker Omnipotence? No one can answer that question ex-ante, but the stakes are high for investors. Diversification amongst asset classes, geographies, and investment strategies (including hedging strategies) remains investors’ most effective weapon against highly uncertain outcomes.
Circular Logic: The Flash Manufacturing PMI (preliminary results of manufacturing activity, including output, new orders and prices) for Japan dropped further in April. Now at 48, the PMI indicates that Japan’s manufacturing sector is contracting (a reading above 50 signifies expansion, below 50 contraction). The PMI reading was dragged down by a decline in exports, which have suffered as a result of a surge in Japan’s currency (the Yen) in the last few months making Japanese-produced goods comparatively more expensive. Already, there are calls for the Bank of Japan (BOJ) to cut interest rates further when they meet this week in an effort to devalue the Yen and make Japanese goods more competitive. But here’s the thing… the recent rise in the Yen coincided with the BOJ adopting a negative interest rate policy in January. Will pushing rates further into negative territory have the desired impact on the Yen, or will it backfire once again?
Be well and godspeed,