The first three months of 2019 are over – and, remarkably, it has proved to be the best quarter for global stock markets since July-September 2010.
Global equities as measured by the FTSE All World Index, which measures 98% of the world’s equity market capitalisation and whose 3,195 constituents include Microsoft, Apple, Nestle and Royal Dutch Shell, rose by 11.4% during the first three months of the year.
Much of that was down to a strong showing in the United States.
The S&P 500, the broadest-based of the major US stock indices, rose by 13.1%. That was not only its best quarterly gain since the third quarter of 2009. You have to go all the way back to 1998 for a better beginning to a year for the S&P.
Other US stock markets also performed well. The Dow Jones Industrial Average rose by 11.15% and the Nasdaq, which is dominated by tech stocks, rose by 16.5%, which was its best quarter since the first three months of 2012.
In Europe, things were not quite as stellar, but were still positive. The FTSE 100 rose by 8.2% during the quarter, its first quarterly gain since the April-June quarter last year, while the FTSE Mid-250 index fared better still with a 9% gain.
On continental Europe, the DAX in Germany rose by 9.2%, which was its best performance since the final three months of 2016.
Meanwhile, the CAC-40 in France finished the quarter up 13.1%, which was its best showing since the first three months of 2015. And the IBEX in Spain, a serial under-performer of late, rose by 8.2%.
Meanwhile in Japan, the world’s second-largest equity market after the US, the Nikkei 225 index finished the quarter ahead by 6%.
More stunning still was the showing put in by China’s blue-chip CSI 300 index. It rose by a stunning 29% during the quarter, its best display since the end of 2014, confirming it as the best-performing major stock market so far this year.
What is so remarkable about the gains seen so far this year is that they come on the back of a dismal end to 2018.
Investors finished last year in a state of despair over the trade war between the US and China and concerns about a slowdown in most of the world’s major economies, notably Germany, the UK, Canada, France and Italy.
So what shifted sentiment? Certainly not the economic fundamentals: most of the data hitting screens early in the new year confirmed fears of a slowdown, notably in the eurozone and Japan.
But it was the response from policymakers that cheered investors.
It became increasingly clear during the quarter that the US Federal Reserve had tightened monetary policy too aggressively during 2018, most notably, in its unwinding of asset purchases (Quantitative Easing in the jargon) made following the financial crisis.
The most important developments so far this year for stock markets, then, have been the Fed’s signalling that further interest rate rises this year are unlikely and further measures from the European Central Bank, the Bank of Japan and the People’s Bank of China to stimulate their economies.
As Max Kettner, multi-asset strategist at HSBC Bank, put it in a note to clients today: “The bulk of the bounce back occurred in January as global equities were boosted by a Fed that pivoted to neutral and a good start to the US Q4 [company] earnings season.”
Interestingly though, the first quarter proved a good one for other asset classes too.
Investors in government bonds – both in developed and emerging markets – enjoyed a positive return for the three months, as did investors in corporate bonds and in commodities, with the oil price enjoying its strongest start to a year in a decade.
The question is what happens next?
With concerns about the Fed now on hold – indeed, the markets are now beginning to price in the possibility that the next move in US interest rates will be down, rather than up – there are still plenty of things for investors to worry about.
Chief among these remain concerns about a possible recession in the United States and elsewhere.
Nowhere is this showing up more than in the market for government bonds. Yields – a measure of the return received – on existing German 10-year government bonds have not only gone negative, but the German government has just issued new 10-year bonds with a negative yield, in other words charging investors for the right to lend to it.
More dramatically, US government bonds – Treasuries in the jargon – were last week showing what is known as ‘yield curve inversion’, where investors are demanding a higher premium for the risk of lending to the US government over the short term than they are for lending to it over the longer term.
The anomaly has since unwound – but such behaviour in the US Treasuries market has historically pointed to a looming recession.
Yet investors from one asset class to another seem divided on when this might be. The global markets strategy team at JP Morgan pointed out today that, while US stock markets appear to be pricing in a 15% chance of a “typical US recession” and US corporate debt markets a 10-25% chance of a US recession, the US Treasuries market “points to an 80% chance of a US recession on our calculations”.
They suspect equity markets in the US are also too upbeat about the future direction of company earnings – the main driver for stock markets.
That view is shared by Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, who believes the next three months will see a renewed focus not on the policies of the central banks but on whether companies are growing profits.
And that is not necessarily good news. He and his colleagues predict that earnings at the world’s biggest companies will fall by 9% during the next year whereas many forecasters are essentially predicting zero growth.
He added: “We say consensus global earnings per share numbers remain too high.”
Another crucial factor that will determine how equity markets perform during the next three months will be a possible trade deal between the US and China.
The latter has been hit badly by the trade war and, although figures published today pointed to China’s manufacturing sector enjoying its strongest performance in March for six months, the data can be unreliable and investors will want to see more evidence of a recovery before getting too excited.
In Europe, meanwhile, concerns over the economic and corporate impact of a no-deal Brexit will continue to haunt investors on both sides of the Channel.
And, as ever, there are specific concerns over some emerging markets. Turkey is one that is moving up the list. The party of President Recep Tayyip Erdogan, who introduced measures last week aimed at combating speculators, performed badly over the weekend in local elections – raising worries over what he may do next.
So, while 2019 got off to a flying start, there are very real concerns that this could be as good as it gets.
As the team at JP Morgan note: “The strong rally in equity, credit and commodity markets over the past quarter has significantly reduced their cushion against growth downside risks”.