A March Overview

The markets have continued higher through the first couple months of the year, as global economic data sets continue to impress.  At some point, maybe soon, the markets need to take a breather.  But, to this point in the year, there has not been a catalyst for a pullback.  Intuitively, we thought the Federal Reserve’s recent rise in interest rates would cause investors to pause.  However, Fed Chair Jane Yellen’s comments were dovish and this kept investors on the buy side.  Unlike many rallies we have seen in the past couple years, this one is being driven by strong economic improvement.  A few points:  

  1. In February, the global composite PMI (manufacturing) remained close to a three-year high and consistent with world GDP growth of around 3½%.
  2. Headline inflation has rebounded sharply over the past couple of months, reaching the Central Bank’s target in the Euro-Zone and exceeding it in the US. However, underlying inflation remains very low almost everywhere, suggesting that policymakers will persist with exceptionally accommodative monetary policy for a long time yet.
  3. Monetary indicators reveal that bank lending is growing at a steady pace in all the major advanced economies.
  4. World GDP growth accelerated to around 3½% on an annualized basis in the second half of last year. This is partly due to stronger growth in China, but aggregate growth elsewhere also picked up.  

Unlike we have seen in the past four or five years, this global economy appears to be gaining a lot of traction.  There will certainly be potholes along the way.  For example, the Federal Reserve will most likely raise rates three times this year.  But, we believe any correction in this time frame would be healthy and lead to further upside by year-end.   

A February Overview

The markets have continued their run from the end of 2016, and while we are richly valued, we feel there are economic reasons that justify the recent ascent.  Compound the global economic rebound with the “deep breath” investors have now taken after the election, and it translates into a good environment for the markets.  Some of the positives we are seeing are:

  • The latest data suggest that global trade growth picked up at the end of last year and business surveys suggest that it remained strong in January.  Specifically, the global Purchasing Managers’ Index (PMI) suggests we could experience 3+% GDP growth this year.  
  • Trade volumes rose in both advanced and emerging economies at the end of last year.  The annual growth rate of exports from emerging economies improved in December.   The improvement was evident even after smoothing out month-to-month volatility.
  • Sometimes it’s the “little” indicators that matter.  Alternative measures are significantly more upbeat. For example, the number of containers passing through the world’s ports and the volume of air freight have both surged recently.  
  • President Donald Trump seems to have toned down his protectionist talk, which puts other countries at ease.  He has placed less emphasis on the punitive tariffs on imports from China and Mexico that he spoke of on the campaign trail.

The market has been on a great run and we certainly welcome the growth.  That said, we are priced to perfection and starting to see a few cracks in the internals of the market.  After such a big run, we would expect a normal correction in this time frame.  There is a strong economic justification for our recent run and we believe any correction in this time frame would eventually give way to higher prices later in the year. 

 

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