So there’s been a bit of a recovery in stock markets so far this year after a dismal December. It’s not very surprising and it does seem to lack conviction.
The year so far has been marked mainly by official downgrades to global economic growth, accompanied at times by “Game of Thrones” rhetoric and headlines such as “Darkening Skies” (courtesy of The World Bank).
We are likely to see more of these downward macro revisions – institutional economists are very aware of what their peers are saying, and don’t reverse direction easily. Other issues which have unnerved markets in recent months are still on the table – end of supportive Central Banks, health of China’s economy, increasing trade friction etc. These are guaranteed to resurface.
Yes, markets may offer better value than 3 months ago – but valuation alone is never enough.
A slower pace to economic growth is not a catastrophe. In fact sustainable slower growth which doesn’t force the pace of inflation or interest rates is quite a benign backdrop for equity markets.
It’s the degree to which corporate profit forecasts may be out of synch with that economic reality that really matters.
There is quite a strong correlation between analyst revisions to their forecasts and stock market direction.
It can be hard for markets to make progress in the face of a storm of analysts downgrades. The next few weeks will see profit forecasts being revisited on the foot of quarterly numbers and company updated guidance. As far as we can tell, this is the next big thing for markets, and at least it’s grounded in company fundamentals and not determined by the next tweet from 1600 Pennsylvania Avenue.
Analysts did move at the end of 2018 to rein in their numbers for the outcome for 2019. Today the consensus forecast for growth in global profits this year is just under 6%. 2020 numbers at just over 10% do seem a bit elevated still. The key question is whether that 6% figure for 2019 comes under further pressure. There will be wall to wall coverage of the actual quarterly announcements, but remember this is a highly choreographed event with companies guiding the stockbroking analysts as to how close their forecasts are to the likely outcome. There is little real predictive power in the exercise.
To make sense of markets it is better to focus on the company statements (like Colgate who last week spoke of profits actually being lower in 2019 than 2018) and critically whether analysts take the red pen to their forecasts.
If we weather that near term storm then the possibility of a Fed pause, perhaps a softer US dollar, and subdued bond yields would all provide support for stocks.
Tradewinds 