A roundup of what The Globe and Mail’s market strategist Scott Barlow is reading today on the Web
Equity markets have been climbing despite a weakening corporate profit outlook and a flagging global economy. The explanation for this counterintuitive trend is coalescing around two factors. First, BMO economist Doug Porter highlights the unique market conditions at the beginning of 2019,
“Recall that the MSCI World index fell over 10% last year, including the near-20% Q4 drawdown in the S&P 500, as markets braced for a recession that didn’t happen. So, even as global growth has dipped to its weakest pace since 2009 this year at 2.9%, and the trade war flared more than conventional wisdom expected, growth was still better than what was priced in at the dawn of the year. And, the Fed’s pivot and three-step rate cuts turned sentiment around on a dime. Together, these two factors have helped drive the MSCI to a 19% gain so far this year, the second best annual rise this decade.”
Second, as Jefferies global equity strategist Sean Darby wrote in a Friday report, the stronger equity markets are a function of the Federal Reserve reversing course after mistakenly tightening monetary policy too fast in 2018,
“Many commentators have questioned the duration of the current economic expansion, but it should be remembered that it is the actions and mistakes of policymakers and politicians that have proved to be the biggest impediments to the cycle’s extension. Just over a year ago, Fed Chairman Powell was concerned about a rise in inflation due to faster-than-expected wage growth. A year on, the Fed has begun to expand its balance sheet and has cut rates three times, to 1.75%... [in China] after a surprising CNY400bn one-year MLF injection on 5 Nov, PBOC injected another CNY200bn on 15 Nov after successive RRR cuts and reforms to the Loan Prime Rate (LPR). In both cases, while the virtue of the idea was correct, the central banks underestimated the unintended consequences.”
“@SBarlow_ROB BMO: Weak end to '18 explains strong '19 for equity markets” – (research excerpt) Twitter
“@SBarlow_ROB Jefferies: “it should be remembered that it is the actions and mistakes of policymakers and politicians that have proved to be the biggest impediments to the cycle’s extension” – (research excerpt) Twitter
“ China cuts short-term funding rate for first time since 2015” – Reuters
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The Financial Times details a huge investor risk factor that keeps growing – the increasing inability of global pension funds to fund their future liabilities,
“General Electric, the US industrial conglomerate, recently announced that it is joining a growing list of companies that are ending guaranteed “final salary” style pension schemes, affecting around 20,000 of its employees. In the UK, tens of thousands of university academics are preparing to take strike action over steep rises in their pension contributions. A common factor in this global pension upheaval has been suppressed bond yields...
“Their house is on fire,” says Alex Veroude, chief investment officer for the US at Insight Investment, which manages money on behalf of many pension funds. “And rates can and probably will go lower from here. Even if the house is on fire, it’s still only the first floor. We think it can hit the second and third floor as well.””
“‘Their house is on fire’: the pension crisis sweeping the world” – Financial Times (paywall)
“@SBarlow_ROB FT: Funding status for pension funds sponsored by S&P 500 companies” – (chart) Twitter
“ Politicians don't want to raise taxes or cut services, and workers don't want higher deductions. That has caused a pensions black hole” – The Economist
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Diversion: “ Hook, Line and Sinker: Do Tinder Matches and Meet Ups Lead to One-Night Stands?” – Springer
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Scott Barlow