Global equity markets are continuing on their bullish run this week, with the S&P 500 hitting a new all-time high in Monday’s session of 3,039.
However, the picture coming out of macroeconomic data suggests that the picture is anything but rosy, with the Federal Reserve expected to announce an interest rate cut on Wednesday, the third so far this year, as it looks to stave off what many believe to be a looming recession.
Analysts at Dutch bank ING are saying that the data flow over the past five weeks has “clearly signalled a deceleration in US economic activity”, bolstering the Fed’s case that the economy could be faltering.
“What started out as a manufacturing downturn resulting from weak external growth, the headwinds from a strong dollar and the uncertainty and barriers to trade caused by the US-China tariffs, is starting to spread to the services and consumer sectors”, they said.
The ongoing uncertainty around the Brexit process, as well as protest movements in Hong Kong and other countries, are also providing key weights on the global economy.
Although, the recent performance of equities would seem to tell the opposite story, with Saxo Bank’s head of equity strategy, Peter Garnry, saying that markets seem to be expecting the global economy to “move into the recovery phase” despite the macro warning signs that have been flashing over recent months.
“US equity valuations are moving into danger zone given the macro backdrop, falling profits and the fallout from potentially higher [interest] rates. But maybe everyone outside equities are just wrong and equity investors are right this time”, Garnry says, although added that investors shouldn’t be “too optimistic”.
He says that a key driver behind the rise in US equity markets was a “relentless upward move in [earnings per share]” driven by higher nominal net incomes and also lower outstanding shares following several buybacks, which increase the value of the remaining stock.
However, the buyback boom seems to be on the verge of ending, with Goldman Sachs reporting this month that S&P 500 share buybacks had fallen 18% year-on-year in the second quarter as firms cut back on costs, meaning that a key catalyst behind the current bull market could be about to disappear.
Technical analysis veteran sees new highs for the Dow despite “confluence of confusion”
The seeming disconnect between the global equity markets and the macro news cycle is also pushing seasoned investors towards more reactionary behaviour as the volatility makes predicting trends difficult despite the current bull run.
Ralph Acampora, co-founder of the Chartered Market Technician Association and considered by some as a pioneer of technical stock market analysis, says that a “confluence of confusion” was making it almost impossible to invest in anticipation of future events.
He says the combination of factors such as Brexit, the trade war, Hong Kong's protests, the US presidential election cycle and other geopolitical events could cause “reverberations in the market, up or down”.
Acampora adds that the Dow Jones Utility Average, which tracks 15 prominent US utility firms and hit an all-time high in early October, was serving as “a sign of defensive activity” as investors sought out stable equities with high dividend yields as they became more cautious.
Despite this, and while he is “amazed” that there has not yet been a catastrophe given the vast number of geopolitical tensions, Acampora says global markets seem to be “absorbing most of the uncertainty” and that gains were beginning to spread beyond US markets and into other countries, a perspective he would not have had six months ago.
“I’m slowly getting more encouraged as time goes by…I think we could see new highs in the Dow”, he concludes, although the picture could become cloudier beyond the end of 2019.