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Global Stock Rally Defies Dimming Economic Outlook

Posted by hkarner - 16. April 2019

Date: 15-04-2019
Source: The Wall Street Journal

Some investors look warily on gains delivered while global slowdown continues apace

Indexes from New York to China have risen double-digit percentages this year.

Global stocks are rising at the fastest pace in decades as growth around the world slows, leaving many investors questioning how much longer the market can defy the gravity of the underlying economics.

Indexes from New York and Europe to China have soared double-digit percentages this year to regain most of their ground after tanking in the fourth quarter, supported by signs that central banks are willing to keep holding interest rates at low levels for the foreseeable future.

The S&P 500 has risen 15%, vaulting above the level where banks ranging from Morgan Stanley to Barclays expected it to end the year. Benchmark indexes elsewhere have rallied, too, with the Shanghai Composite rising 28%, the Stoxx Europe 600 up 15% and a measure of emerging market stocks up 14%.

All told, global stocks would close out 2019 with their best annual returns ever if they kept rising at their current pace, according to a Bank of America analysis.

Still, investors are trying to square their big returns with the fact that they have arrived while the global economic outlook has grown progressively dimmer. Fund managers also have increasingly questioned whether the Federal Reserve’s pivot from raising rates to holding them steady reflects economic weakness that will ultimately derail the market’s rally.

The International Monetary Fund in April cut its outlook for global growth in 2019 to 3.3% from estimates of 3.5% in January and 3.7% in October, warning that trade tensions and declining business confidence were weighing on nearly all countries around the world. The IMF isn’t alone. The Fed and European Central Bank have also trimmed growth forecasts in recent months. And in China, officials have ramped up spending and cut taxes to try to boost a slowing economy.

“A pullback would not surprise us at a time like this,” said Tony Roth, chief investment officer at Wilmington Trust Investment Advisors. This year, the firm has shifted more money into shares of large U.S. companies while trimming positions in developed markets outside the U.S. That is a bet that growth in the U.S. will hold up better than in places like Europe and Japan, which “don’t look like they have much in the way of upside catalysts,” Mr. Roth said.

Fund managers and analysts will see a test of that thesis next week, when dozens of U.S. companies—including Goldman Sachs Group Inc., Netflix Inc. and Philip Morris International Inc. —report first-quarter earnings.

Because of the global growth slowdown and the waning boost from 2017’s U.S. tax cuts, S&P 500 companies are expected to post their first year-over-year decline in earnings since 2016. Investors are still debating how much effect, if any, the slowdown will have on the stock market’s 2019 rally.

“Most folks are already anticipating a pretty ‘blah’ earnings year,” said Jason Ware, chief investment officer at Albion Financial Group, but added that a big question for financial markets will be whether earnings end up contracting more than expected, Mr. Ware said.

The stock market has stumbled when companies like Apple Inc. and Caterpillar Inc. have warned their profits would come in short of analysts’ expectations. That is partially because those companies, among many others in the S&P 500, generate much of their profits overseas—making them bellwethers for the health of the global economy.

“We don’t know when China is going to catch fire,” Mr. Ware said, adding that his firm has avoided taking outsize positions in stocks in foreign markets because of high uncertainty about the economic outlook.

For stocks to keep rising, many market watchers believe the world economy must hold at a sweet spot—showing signs neither of rolling over nor of unexpectedly heating up.

The latter point is particularly important, since central bankers have signaled their willingness to forbear raising interest rates as long as inflationary pressures continue to look muted.

“I don’t have any worries on financial stability right now [or] worries about inflation pressures getting red hot,” John Williams, president of the Federal Reserve Bank of New York, told reporters after a speech Thursday. In a separate address, ECB President Mario Draghi said inflationary pressures in the eurozone were likely to decline, not increase, over coming months.

Some investors are also taking comfort in the fact that the current stock rally bears few apparent similarities to so-called “melt-ups,” periods when share prices rise rapidly because money managers wary of missing out on further gains decide to pile into the market.

During a melt-up at the start of 2018, stocks around the world flew higher—then began careening in a matter of weeks.

Unlike at the start of that rally, however, surveys this year have suggested investors’ risk appetite is modest. Just 3% of fund managers say they have overweight—or larger-than-average—positions in global stocks, the lowest share since September 2016, Bank of America found in a March survey. To contrarians, market rallies can look more durable when investor enthusiasm appears more muted.

“We’re neither running too hot nor too cold,” Mr. Roth said of the economy, adding that this has helped stocks get as far as they have this year. The labor market has added jobs for a record 102 consecutive months. Relative weak spots like the housing market have shown signs of firming. And inflation has remained tame: At the start of the year, the Fed’s preferred inflation gauge, the price index for personal-consumption expenditures, notched its smallest year-over-year gain since 2016.

But after a banner first quarter, Mr. Roth and others say markets look vulnerable to pullbacks—especially if continuing trade negotiations between the U.S. and China break down.

“If something happened to the trade situation and it unraveled, it’d be catastrophic to markets,” he said.

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