The Navigator provides insight into stock market events with an outlook.
“The analyst thinks, the stock market steers”. What many had been expecting for some time happened in the first quarter: The stock markets corrected by around 10% within a few days.
Correction in the 1st quarter
“The analyst thinks, the stock market steers”. What many have been expecting for some time has now happened in this first quarter: At the turn of the month from January to February, the stock markets corrected by around 10% within a few days. The high correlation was striking; hardly any market was able to escape the correction. In terms of sectors, defensive stocks have suffered greatly in view of the continued robust economic growth and rising interest rates.
Interest Rates
Interest rates continued their rise from the last quarter of 2017 at the start of the quarter. The rise in wages in the US, 2.6% for 2017 and then 2.9% for January 2018, the strongest increase since 2015, was a talking point. Voices predicting an imminent rise in inflation have become louder. Critics of rising inflation in the near future point to the still large pool of potential workers on the sidelines. When unemployment is relatively low, there is typically upward pressure on wages. Not so these days. Although the economy is doing well and unemployment figures in the US, for example, are also historically low, there has been no sharp rise in wages. The latest figures are rising, but were also seen in 2015 and then flattened out again. The 200,000 new jobs created per month in the period after the financial crisis in 08/09 is a good figure. In terms of the growth in newly created jobs, however, it is weaker than what was seen before the financial crisis. In the years before 2000, monthly job growth averaged 2.6% per year and even 3.1% in the 1980s. The crux of the matter probably lies in the denominator of the percentage of unemployed. With the financial crisis, millions of workers have dropped out of the labor force and subsequently out of the unemployment statistics. The proportion of the working-age population in the labor market (i.e. either with a job or looking for one) has fallen from just under 68% in 2000 to around 63%.
If the economy picks up, some people might consider looking for a job again and, as a consequence, wage growth would lose some of its momentum.
Inflation (CPI/official consumer price index) for the USA was 2.1% in February. After five years of an average of 1.3%, this is something of a revival. The situation in the eurozone is still somewhat different: although the ECB is still pursuing a very loose monetary policy, in contrast to the US Fed, inflation as at February 2018 is still some way off the target of 2% at 1.1%. History has shown time and again that inflation can rise relatively quickly and unexpectedly. The loose monetary policy practiced in recent years would typically be the basis for higher inflation in the future. When and to what extent remains to be seen. Political tensions, faltering globalization (recently discussed and threatened punitive tariffs) and, last but not least, the high debt burden are the cornerstones and are likely to have a significant impact on future developments.
Companies / Sectors
With the global economy picking up, cyclical stocks have tended to come to the fore. Technology stocks, cyclical consumer goods and financial stocks started the new year better than the rest. Defensive stocks, on the other hand, were unable to keep pace and lost ground.
Market technology
A correction has (finally) occurred in the upward trend, which was intact until now. We dare to doubt whether this is already complete. In our opinion, there is a good chance that it could go down another notch. The upward trend underlying this correction still appears to be intact, but we are most likely in the final phase of this bull market, which has already lasted almost 10 years (low S&P 500 in March 2009).
The market continues to be supported by a small number of stocks. As shown below, a high number of new 52-week lows have recently been added to the overall overview for the US market, for example. This may have been less accentuated for certain European markets, but the other stock markets will hardly be able to escape a battered US market.
If the current correction takes place within the forecast framework, we expect the market to rise further. With interest rates firmer and the economy performing very well in some cases, a more serious correction or longer consolidation should then bring the market back onto a more solid technical footing.
Outlook
The global economy should continue to perform well, even if growth rates could weaken somewhat. There are many areas of tension, and nervous markets and a temporary increase in volatility will probably keep us busy more often as a result. The central banks are likely to continue on their current path and this could work well for the foreseeable future. It is likely to become difficult when inflation starts to gain momentum.
It remains to be seen whether countries will be able to save and reduce their debts or whether there will be more financial repression. It is good to be prepared if you take the latter into account as much as possible in your financial planning. With this in mind, don’t put all your eggs in one basket. With EDURAN AG, you have the opportunity to diversify broadly. With this in mind: Happy Easter!
EDURAN AG
Thomas Dubach