5 Months of Nothing

Last week felt very quiet to us; perhaps not surprisingly so with 4th July celebrations in the US, the sporting calendar in the UK and Europe and people thinking about heading off to the beach as the UK enjoys its best summer weather in decades. So, we will keep this week’s commentary brief.

In the aftermath of the volatility led correction in early February, financial markets have mostly gone sideways, as seen in the chart below of the MSCI World Equity Index. US equity markets have performed a little better and emerging markets a little worse with European markets almost unchanged on the year to date. The experience has also been a little different depending on your home currency too, with non-Dollar investors feeling slightly better than those that measure performance in Dollars. But overall, we best characterise the last 5 months or so as rangebound.

Chart 1 – MSCI World Equity Index (price only)

However, it is not right when we say that nothing has happened. There have been shifts in both fiscal and monetary policies, headline grabbing political issues and changes to trade policies to name a few. And of course, everyday there are thousands of transactions in markets between willing buyers and sellers that result in a change of ownership. So, to put this another way, despite all of the changes seen both in markets and the real world, equity prices have been very steady.

The same kind of sideways, rangebound market can also be seen in the US bond market (European yields have generally been a bit softer with prices higher) as can be seen in chart 2 below. Despite continued gradual rate rises from the Fed, fiscal stimulus and higher inflation the US bond market has been remarkably steady.

Chart 2 – US 10-year generic government bond yield

So, what’s our point here? Well, markets don’t go sideways forever; at some point the boundaries of the recent ranges will be broken and price will embark on new trends. It may also be sensible to accept that we cannot predict with certainty which way these markets will break, and so we need to be patient for the market to tip its hand.

In support for the bullish camp, we would say that markets have been resilient despite the brewing trade conflict and tightening by the Federal Reserve. With economic growth still moving forward nicely, even accelerating modestly in the US, corporate earnings have continued to grow. And in particular, we would point out that both business and consumer confidence remain very much in the positive ledger, especially in the US.

In this cycle, it has paid to be bullish so long as markets either believe that the risks are acceptable compared to the risk-free rate (mostly zero in recent years), or are capable of ignoring bad news, or that central banks will rapidly head off any trouble with new stimulus. Looking at the charts above, it seems obvious, but unless price breaks below the recent lows in equity markets (yield highs in bond markets), why on earth should investors be worried?

We suggested last weekend that if the Dollar could ease off a bit from recent gains, then the likelihood was that risk assets could nudge higher. Broadly speaking, so far so good with that call, and we stick with it. We also noted last week that the tone in markets over the Summer is one of subdued activity, and that outcome would fit very much within our rangebound analysis above, with equity markets perhaps trading to the top end of the now quite well-defined range.

So, a little bit bland from us here at this short-term juncture, although we have no doubt that there will be plenty of talking points in the months ahead. Markets are seemingly happy to stand still even as things change around them, and now continues to seem like a time to do less and watch more.

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