Market Strategy 3/18/2019
Give Peace a Chance
Key Takeaways
- Stocks rebounded in a strong rally last week as investor sentiment turned positive.
- Prospects for a meeting between US President Trump and Chinese President Xi were pushed into April, but that didn’t dull investor appetite for stocks.
- Economic data that crossed the transom last week underscored a potential softening in US activity as well as a cooling in inflationary pressures.
- International equities joined last week’s rally on continued expectations for a trade deal and prospects for US interest rates to stay low.
Whether it was an on again mode of expectation for a resolution to the trade dispute between the US and China or a good feeling about the Fed “pivot” (if not a Fed “put”) markets globally appeared last week to sense a possibility that opportunity might outweigh risk on the landscape as a favored thematic to drive the direction of stock prices near term.
The week prior to last had seen stock prices show vulnerability and give back some earlier gains on concerns that had fed negative sentiment and the thought that a chance of arriving at a resolution to the trade fracas was ebbing and that growth stateside and internationally was locked into a slow fade.
Then last week happened and market participants focused more on what was going right or even just what was likely to go right rather than what was going wrong and stocks put in a rally that saw the Dow Jones Industrial Average, the S&P 500 index and the NASDAQ Composite post respective weekly gains through last Friday of 1.6%, 2.9% and 3.8%.
The S&P 400 (mid-caps) and the Russell 2000 (small caps) participated in the rally though slightly underperforming their large cap counterparts. Foreign markets rallied sympathetically with MSCI EAFE (developed international markets ex-US and Canada) gaining 2.8% while the MSCI Emerging Markets and the MSCI Frontier markets respectively advanced 2.6% and 1.1%.
By Friday’s close the S&P 500 was less than 4% shy of its record high of 2930.75 reached on September 20th of last year. The NASDAQ Composite was just little more than 5% away from its peak on August 29th.
Investors focused on the fundamentals
Even as the likelihood of a meeting between the presidents of the US and China got pushed into April near the end of last week, investors didn’t seem to blink and instead focused on data that signaled inflation remained benign, growth remained intact, and monetary policy seemed more likely to remain more dovish than aggressive for the foreseeable future.
From our perspective the underlying challenge for the Fed, the ECB and the BOJ as well as a host of other central banks around the world lies in reflating economies to sustainable target levels rather than having to battle untoward inflationary pressures. It’s not so much that inflation couldn’t become an issue to be addressed at some point in the future but rather that for now (as well as for much of the last decade) “post-recession growth” in the current cycle simply “ain’t what it used to be”.
We think the low levels of inflation registered in economic data have less to do with monetary policy tools that helped the US and other countries’ economies exit the financial crisis as they have to do with the effects of secular globalization and technology along with demographic trends worldwide that resulted in a change in the traditional balance (or imbalance) that can occur and affect supply and demand.
In the current environment we’d suggest that the risk ahead is not the reemergence of the shortages like those that drove the inflationary spiral of the 1970s and 80s, but rather it’s the abundance of commodities, goods and services (and the means of production) that have created overcapacity in many segments of commerce.
As a result the real challenge for central banks in most of the developed world and much of the more advanced economies of the emerging world is managing abundance. The very essence of abundance would seem to us to be counterinflationary.
Clues of these challenges on the economic landscape are found in wage and commodity price gains that are more modest than economists might have expected this late into an expansionary cycle (see our discussion on page 4 ahead). Consolidation evident in M&A (mergers and acquisitions activity) across a myriad of sectors appears in no small part to show businesses are addressing overcapacity that’s been created by systemic counter-inflationary trends generated by globalization and technology.
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