Global stimulus continues to drive US stock prices higher

Friday, 5th April 2019 10:17 - by Shant

It has been another positive week for US stock markets and judging by the drivers which prompted the sell-off at the end of last year, it is unsurprising to see the recovery continue and attempt a push on to better levels.  The sharp U-turn by the Federal Reserve has in no small way generated the rally in early 2019 which now has a serious change of retesting the all-time highs achieved in 2018, with the added boost from the Chinese manufacturing purchasing manager indices which are back in expansionary territory as revealed at the start of the week.  Hopes that the US and China find a resolution have fed through also through a series of positive messages put out by leaders on both sides, so the cocktail of positive inputs has led to an ongoing appetite for risk.

Timing has also coincided with the new fiscal year in Japan, and with the BoJ maintaining its asset purchasing program, divestment flow is adding support to the rise in US stocks.  The S&P 500 is now eyeing a move on 2900, and the NASDAQ 8000.  Not far beyond these levels lie record highs and it is highly conceivable that we push on to set new highs here.  When you consider that the Fed has built up a monetary policy butter to the tune of 250bps, we can see that there is a strong belief at present that any adverse developments in the financial markets will be met with an accommodative response.  Indeed, the rates markets are already pricing in a Fed rate cut at the turn of the year, and this saw the benchmark 10yr Note flirting with sub 2.50% a few weeks back.  

I am rather more inclined to believe that the ability of the Fed to ease financial conditions is more likely to be the key factor in supporting US stock valuations rather than any optimism over a trade deal between the US and China.  The latter would ultimately return the global stage back to a position of neutrality in trading terms, though as yet, tariffs administered are still in place as the global activity continues.  The word global does not seem to warrant enough attention when addressing the outlook on the equity markets.  As I have mentioned above, Japan's asset purchasing program has implications for western stocks - most notably in the US.  In the real economy, the slowdown in China has resulted in diminished demand on a worldwide basis and is clearly impacting on export-reliant regions such as the Eurozone.  

Perhaps then, the theme is to look to place capital in the least vulnerable regions.  Consumer-led economies will - in my view - continue to outperform in the current economic climate, which then slots the UK into that bracket given the specific nature of society.  Were it not for the Brexit impasse we are suffering through, I could see a strong case for the UK adopting a safe haven environment for investors, but as I have already mentioned this week, any lengthy extension to the withdrawal date only serves to hinder investment and foreign capital inflows will be limited in the interim.  

So the battle lines have been set, and contrary to what I believed would have developed from the fallout seen late last year, Wall Street continues to offer safety, not least in geographical terms.  Coming up soon we have the European elections, which will add further uncertainty and possible upheaval for investors to consider, so timing is key here and whatever ones view over the longer term, shorter term timescales seem to proffer ongoing stability at the very least.  With fears over a Chinese slowdown 'interrupted' by the upturn in manufacturing data, markets can and have breathed a sigh of relief, so any imminent fears of a valuation meltdown will naturally be tempered.  And from what I can see, they are. 

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.