Five Tailwinds Boost the Global Market Rally
State of the Global Market
Global stocks hitting all-time highs. Here is a quick summary of the state of the global markets:
(-) Higher interest rates
(-) Geopolitical shocks
(-) Rich valuations
(+) Equity managers play catch-up
(+) Sentiment is not overheated
(+) Sluggish supply
(+) New economic tailwinds
(+) Tax trade
In our previous posts, we discussed the positive outlook for Emerging Markets and the lofty valuations of stocks. We keep emphasizing that a changing monetary policy by the Fed will eventually stop the current, global bull market in stocks. However, this will not happen over night. Here are five tailwinds that boost the global market rally:
(1) Equity Managers Play Catch-Up
Discretionary macro hedge-fund managers as well as active mutual-fund managers are flat or have lagged benchmarks for the first three quarters. According to JPMorgan Chase & Co., they are likely to chase markets.
(2) Sentiment is not overheated
According to last month’s JPMorgan investor survey, approximately 60% of money managers reported above-average cash balances. This is quite interesting since we are in low-fear environment, as the recent all-time-low in the VIX shows.
(3) Sluggish Supply
With so much liquidity in the market, banks are struggling to source new bonds. Dealer inventories of high-grade bonds at the end of last month was at just $3.5 billion, down from $8.6 billion on Sept. There is a lack of bonds available, which is the result of macro-conditions for strong demand.
(4) New Economic Tailwinds
Global growth is faster, firmer and more synchronized than it has been in years. According to Nomura Holdings Inc., the long-waited increase in productivity could have started. Last month, American manufacturing expanded at the fastest pace in 13 years, underscoring resilient global demand and U.S. capital spending. This suppose to add momentum to the dollar and equities.
(5) Tax Trade
According to Bloomberg, Morgan Stanley concede a repatriation tax would limit corporate bond supply and boost cash balances. Mikkelsen at Bank of America reckons high-grade credit spreads could hit a new post-crisis low over the next year, as the benefits elicited by tax reform offset a tighter U.S. monetary stance. Mikkelsen at Bank of America reckons high-grade credit spreads could hit a new post-crisis low over the next year, as the benefits elicited by tax reform offset a tighter U.S. monetary stance.
What to expect for the next weeks?
Stocks remain the strongest asset class. Emerging Markets (EEM), Japan (EWJ) and Europe (VGK) are the current favorites and we expect these trends to continue. The weakest performing asset classes are Gold (GLD), REITS (ICF) and intermediate-term Bonds (IEF). Recently, we saw the biggest change in Momentum in Commodities (DBC). During the last weeks, Commodities gained Momentum, now trading close to the upper band of its 1.5-year trading range. A successful break of the $16 resistance line could be the beginning of a new, intermediate-term uptrend.
