Is the market rally sustainable?
On the latest edition of Market Week in Review, Quantitative Investment Strategist Dr. Kara Ng and Research Analyst Brian Yadao discussed the recent strength in markets and the global economic outlook.
Markets hit record highs on expectations of Fed easing
Equity markets finished the week of July 8 on a peak, Ng said, with both the S&P500® Index and the Dow Jones Industrial Average establishing new all-time highs. This, she noted, happened despite a weakening global economy and predictions for a disappointing second-quarter earnings season. So, why are stocks rising steadily upward?
"It’s mostly because the market is putting all of its chips on expected easing by the U.S. Federal Reserve (the Fed) and other central banks," Ng said, noting that she and the team of strategists at Russell Investments typically analyze the cyclical attractiveness of equities by three lenses: the economy, corporate earnings and monetary policy.
Global economic outlook appears bleak
The outlook for the global economy looks grim at the moment, Ng said, with global manufacturing Purchasing Managers’ Index (PMI) numbers at their lowest levels since 2012. Zooming into the eurozone in particular, she noted that German manufacturing orders recently plummeted by 8.6% on a year-over-year basis, sparking fears of a recession in the region’s largest economy. "Elevated trade tensions over the last few months probably led to this decline," Ng said, explaining that the China-U.S. trade war has reduced demand for foreign goods, with Germany serving as a prime example.
Dismal projections for Q2 earnings season
Second-quarter earnings season kicks off July 15, Ng said, and early signs are pointing to less-than-stellar numbers. "The number of S&P500® Index firms issuing negative earnings guidance for the second quarter -87 total - is tracking to be the second highest in FactSet’s published history," she explained. Overall, second-quarter earnings are projected to be flat or slightly negative, when compared to Q2 2018. "If Q2 2019 earnings come in negative, it’ll mark the second straight quarter of a decline in earnings, putting the U.S. at risk for an earnings recession," Ng stated.
This is somewhat worrisome, she said, because earnings recessions and economic recessions usually happen simultaneously. However, this is not always the case, as evidenced by 2016, when there was a decline in earnings but no recession, Ng pointed out. "In a nutshell, the downgrades in earnings forecasts aren’t a great sign for the health of the economy, but are in no way a death sentence," she said.
Fed rate cut looks increasingly likely after Powell testimony
June’s strong U.S. jobs report, coupled with a slightly stronger-than-expected increase in the Consumer Price Index (CPI), presented an opportunity for Fed Chair Jerome Powell to communicate that a July rate cut may not be quite as likely - but he did the exact opposite in testimony before the U.S. Congress, Ng said. "Powell flagged business uncertainty, global trade tensions and some softer growth numbers as risks to the economy, and also noted that the link between inflation and unemployment has broken down recently," she stated.
Even more notable, the Fed chair said that the central bank’s monetary policy may not be as accommodative as originally thought, Ng noted. "Put together, this means the Fed is probably on track to cut interest rates at the end of the month," she said. While the expected easing is a near-term positive for equity markets, Ng believes that a greater level of stabilization is needed for both the global economy and earnings in order for the current rally to be sustainable.
Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.
The information on this website is only intended for use by professional clients, regulated financial advisers and intermediaries who are knowledgeable and experienced in the financial services market and in investment products of this nature. If you are a retail or individual investor then please leave this website immediately and consult your financial adviser.
You should not use this website unless you understand its nature and the extent of your exposure to risk. You should also be satisfied that the website and investments are suitable for your client in light of their circumstances and financial position.
The information contained on this website is for information purposes only and you should not take it as constituting an offer, solicitation, inducement, commitment or invitation to subscribe for or to purchase, sell or hold any interest in any of the investments mentioned herein.
This website is not intended for distribution or use by anyone in any jurisdiction in which such distribution or use would be prohibited. Nothing on this website or in the materials referred to therein constitutes, or is intended to constitute, financial, tax, legal or other advice.
The value of investments, and the income from them, can go down as well as up and you may get back less than the amount invested. Any past performance figures are not necessarily a guide to future performance.
The website may contain forward-looking statements, which are based on a number of assumptions regarding present and future business strategies, which may or may not prove to be correct. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Forward-looking statements are not guarantees of future performance.
Issued by Russell Investments Limited. Company No. 02086230 and Russell Investments Implementation Services Limited Company No. 3049880. Registered in England and Wales with registered office at: Rex House, 10 Regent Street, London SW1Y 4PE. Telephone +44 (0)20 7024 6000. Authorised and regulated by the Financial Conduct Authority, 12 Endeavour Square, London E20 1JN.
All reasonable care has been taken by us to ensure that the information contained on this website is accurate at the time of publication. However, we accept no responsibility for the accuracy, adequacy or completeness of the information and materials contained on this website and expressly disclaim liability for errors or omissions in such information and materials. We and our respective affiliates do not have any obligation to update the information contained in this website and reserve the right to change these terms and conditions at any time, without notice.
We will not regard you or any person who accesses this website as our client in relation to any of the investment products or services detailed therein, unless expressly agreed.