Has the Bull still got a spring in its step?

Last Friday was a momentous day. Not only did it feel like Spring may finally be in the air, but it also marked the nine-year anniversary of the start of the current bull market. Yes, the previous bear market officially ended on 9 March 2009 following a 17-month bloodbath that saw US markets fall by 57% – the second-steepest peak-to-trough decline since 1932.

Since then, the S&P 500 has quadrupled, boosted by a heady combination of extreme monetary stimulus and improving corporate profitability. It clearly hasn’t all been plain sailing and there have been several corrections along the way, but the current bull market is now reaching a ripe old age and could be set to break more records – if it continues through August it will become the longest bull market since the Second World War. 

Indeed, our view is that this milestone is achievable. The US economy still appears to be in good shape, a point reinforced by Friday’s strong non-farm payrolls, which showed 313,000 jobs were added in February, the largest increase since July 2016. In addition, fears over inflationary pressures were eased by a lower-than-expected wage increase in February and a downward revision to January's figure.

Our view remains that the US economy is capable of sustaining the anticipated future interest rate rises. It is true that, as the US Federal Reserve gradually increases rates over the coming months, we are likely to see greater market volatility. However, if equities were to fall and bond yields rise further, we would actually view this as an opportunity.

 

Index 1 week 3 months 6 months 1 year FTSE All-Share 2.5% -0.9% 0.3% 4.1% FTSE 100 2.3% -1.3% -0.4% 2.7% FTSE 250 3.7% 0.7% 3.4% 9.2% FTSE SmallCap 1.8% 1.3% 2.3% 11.0% S&P 500 2.9% 1.7% 8.4% 4.7% Euro Stoxx 2.6% -1.3% -0.3% 10.4% Topix -1.7% -2.5% 4.3% 6.0% Shanghai SE 1.1% 1.3% -4.7% -1.8% FTSE Emerging Index 0.8% 6.2% 4.9% 14.3% Source: FE Analytics, data sterling total return to 9 March

US allies spring into action

It felt like Groundhog Day in Washington, as the roller-coaster that is Donald Trump’s administration went for another, now familiar, wild spin around the track. The week began with one more resignation, this time the President's chief economic adviser, Gary Cohn, amid speculation of ever-increasing chaos in the White House and Trump’s hardening protectionist stance on US trade policy.

This was followed on Thursday by the President signing two proclamations outlining the impending imposition of a 25% tariff on imported steel and 10% tariff on imported aluminium. Exemptions were set for next-door neighbours Canada and Mexico, while negotiations continue around the North American Free Trade Agreement, and secured by Australian Prime Minister Malcolm Turnbull following a phone call with President Trump. UK Trade Secretary Liam Fox is heading to Washington this week to discuss the duties, while EU trade commissioner Cecilia Malmstrom said she had received “no immediate clarity” following a meeting with US Trade Representative Robert Lighthizer in Brussels on Saturday. The meeting also included Japanese Trade Minister Hiroshige Seko whose country is similarly seeking an exclusion.

While Trump’s protectionist rhetoric may prove little more than a negotiating tactic it is certainly stoking fears of a potential global trade war and it remains unclear exactly what impact the tariffs will ultimately have on the markets. The situation is unpredictable and we will monitor it closely, as any potential trade war could well result in lower-than-expected global growth and equity returns.

New friendship blossoms

Donald Trump further ensured his dominance of last week’s headlines by announcing he had accepted Kim Jong-un’s offer of a presidential meeting to discuss North Korean denuclearization in May. This marks an abrupt turnaround following decades of diplomatic freeze and months of personal Twitter invective. 

How this blossoming relationship will unfold is as unpredictable as it is unlikely. At a Republican rally in Pennsylvania over the weekend, Trump told supporters that he believed North Korea did want to make peace. With typical imprecision, the President suggested there was hope of ground-breaking progress on nuclear disarmament, telling a Republican rally in Pennsylvania, “Hey, who knows what will happen? I may leave fast or we may sit down and make the greatest deal for the world." Nuclear disarmament would certainly be a ‘great deal’ for the global economy. It remains to be seen whether the thaw in relations will last.

UK budget hopes spring eternal

Philip Hammond has played down expectations surrounding Tuesday’s Spring Statement, though it is expected to contain details on the cost of Brexit. The Statement will include the latest economic forecasts from the Office for Budget Responsibility and these should be more palatable than the ones Hammond had to deliver during his Autumn Budget.16 Maybe the new forecasts will even put a spring in the Chancellor’s step.
 

Bonds

UK 10-Year yield 1.49%
US 10-Year yield 2.89%
Germany 10-Year yield 0.64%
Italy 10-Year yield 2.00%
Spain 10-Year yield 1.43%

Monday 12 March
US: Federal Budget
Preliminary Results: Clarkson
Full-year results: Polymetal International

Tuesday 13 March
UK: Spring Budget Statement
US: February CPI, NFIB Survey 

Preliminary results: John Menzies
Interim results: Close Brothers Group
Full-year results: Cairn Energy, Computacenter, Baillie Gifford Shin Nippon, Antofagasta

Wednesday 14 March
EU: Eurozone fourth quarter employment, January industrial production; German CPI, Merkel’s fourth term as Chancellor begins
US: February retail sales and industrial production
China: February industrial production 

Preliminary results: Hikma Pharmaceutical
Full-year results: Prudential, Marshalls, William Morrison Supermarkets, Kenmare Resources, Gem Diamonds, Forterra, Dignity, Charles Taylor, Balfour Beatty

Thursday 15 March
US: February import prices, March New York and Philadelphia Fed manufacturing surveys 

Interim results: Kier Group
Full-year results: Savills, Spirax-Sacro Engineering, Phoenix Group Holdings, OneSavings Bank, Old Mutual, Cineworld

Friday 16 March
EU: Eurozone fourth quarter labour costs
US: February housing starts, industrial production, preliminary March Uni. of Michigan consumer sentiment survey 

Quarterly trading statement: SThree, Investec 
Interim results: JD Wetherspoon

Julian Chillingworth
Chief Investment Officer