Just a Minute series: September 3rd 2019
2019 so far seems to have been a year when financial markets were driven by tweets and fantasy phone calls on Sino-US trade deals.
Real economic data has been mixed with manufacturing numbers weaker (especially forward looking ones) but consumers and jobs holding up better. Those clamouring for imminent recession are having to pay a lot of attention to unusual patterns in bond markets where at times we have seen longer dated bonds yielding less that shorter ones.
It would be convenient to think that absent the tweet chatter, financial markets would behave a lot better. There are two problems with this. The tweets (and the policy vacillations) aren’t likely to go away anytime soon. And even if the dust were to settle, investors need to take account of a number of issues in coming to a market view. To be considered are:
The global economy is shifting down a gear. While there is collateral damage from the escalation in trade tariffs and uncertainty, there is also a fundamentally driven slow-down in the global economy. Demographics, debt overhang and low productivity are among the sources of this.
Corporate profit expectations have been dragged down. Consensus global forecasts for 2019 are now basically flat, having started the year at 7%+. The worry is that analysts have yet to take a red pencil to their 2020 numbers, where consensus growth forecasts are still in double figures.
And yet despite sluggish economic and profits growth, market valuations are reasonably extended. The US stock market for example is on 16 times 2020 earnings – by no means cheap.
Markets can muddle through – they often do. But as the factors above point to – even if the current particular type of dust were to settle – there’s still a heap of dust around.
VIX Uncertainty Index
Tradewinds 