Global equity markets added another 6.5% in Q2, capping the highest first-half returns since the late 1990s.[i] As we anticipated, Q2 had more chop than Q1, but a gangbusters June brought shares to all-time highs and up 17.1% year to date.[ii] With the sharp, V-shaped rebound from last year’s correction (a short, sharp, sentiment-driven drop of roughly -10% to -20%) behind us now, we think it would be unrealistic to expect this torrid pace to continue. That said, and whilst near-term volatility or a correction is always possible, we forecast the bull market to persist through 2019’s close at least.
Markets are behaving largely as we think is typical of a later-stage bull. The biggest companies—which we call mega caps—are outperforming as investors seemingly prefer fast-growing companies with fat gross profit margins. Market breadth—the percentage of companies outperforming the index—is narrowing, which our research shows is usually the case when mega cap leads.
We think global markets’ economic backdrop still looks favourable. Low interest rates, low inflation and moderate growth collide in a classic Goldilocks economy—not too hot, not too cold, but just right, in our view. Even better, most pundits we follow seem to see this wrong. Many couple the bull’s age with the recent global growth slowdown and conclude the expansion must be dying before their eyes. They seemingly forget economic ebbs and flows are normal. We think fear of heights—prevalent today, in our experience—is likely just another brick in the bull market’s proverbial wall of worry.
Politics took centre stage in Q2 amongst the commentators we follow, with the Tory leadership contest and June’s US Democratic Party presidential debates seemingly garnering the most attention. Regarding the former, knowing whether Boris Johnson or Jeremy Hunt will be the next prime minister may alleviate a smidge of uncertainty, but we think simply getting on with Brexit would be the best tonic of all. As for the latter, we think it is too early to parse next year’s US presidential election. With 25 Democrats vying to challenge President Trump, there is too much noise, in our view. The time to focus on the election will come, but probably only once each main party’s nominee is apparent. In the meantime, whilst we remain in the presidential cycle’s best year for US markets historically, we are also likely at the point where gains typically slow, partly due to campaign chatter’s drag on sentiment. Yet Continental European political tailwinds should be powering up now that the parliamentary election has passed. Historically, the aftermath of European Parliamentary votes has been positive for Continental European shares much more often than not.[iii] We think this time should be no exception, as the vote expanded political gridlock, which should help reduce uncertainty and alleviate fears of eurosceptics and populists disrupting the EU. In our opinion, gridlock and falling uncertainty are generally bullish for shares.
To us, one hallmark of this long, grinding bull market is its seemingly endless wall of worry. In our regular coverage, we found headlines throughout Q2 sowing fear of oil, Iran, tariffs, Brexit, the inverted US yield curve, a seemingly weak global economy and more. In our view, all are either too old, small or misunderstood to derail the bull. Some appear to be a combination of the three. Oil doesn’t seem like much of a factor either way to us as the world economy is far more energy-efficient than in the 1970s. Parallel to that, we think the Iran nuclear threat looks more like Iran wants US sanctions lifted as the economy suffers, not an actual war. Tariffs? Too tiny, in our view, even with the latest threats, at just 0.3% of global GDP.[iv] Brexit stokes uncertainty, which has likely dragged on UK economic output. But Brexit also seems likely to end soon, with any outcome short of the apocalypse probably beating expectations. As for the yield curve, we think the time to worry is when most everyone loses interest and the global yield curve inverts. Not when financial news headlines we survey obsess over very shallow inversions, like today. Lastly, slower growth isn’t necessarily a self-fulfilling prophecy, and we think this bull market has already demonstrated that equity markets don’t need fast GDP anyway.
We aren’t blind to risk. We monitor many indicators for signs of a bear market developing. But we see little pointing to that happening now.
We hope you found this summary of our views informative. For more on our services and outlook—including a copy of the forthcoming full Markets Commentary—please contact us at 0800 144 4731.
- Fisher Investments’ Investment Policy Committee
Aaron Anderson, Ken Fisher, Michael Hanson, Bill Glaser and Jeff Silk
Investing in financial markets involves the risk of loss and there is no guarantee that all or any invested capital will be repaid. Past performance neither guarantees nor reliably indicates future performance.
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[i] Source: FactSet, as of 2/7/2019. MSCI World Index return with net dividends, 31/3/2019 – 30/6/2019.
[ii] Source: FactSet, as of 2/7/2019. MSCI World Index return with net dividends, 31/12/2018 – 28/6/2019.
[iii] Source: FactSet, as of 9/7/2019. Statement based on MSCI Europe Ex. UK returns denominated in local currencies in the 12-month periods following European Parliamentary elections since 1979. Currency fluctuations between international currencies and the franc and euro may result in higher or lower investment returns.
[iv] Source: FactSet, US Trade Representative, Bloomberg and US Census Bureau, as of 27/6/2019. Includes threatened US tariffs on global autos and US$300 billion in Chinese goods.
Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.