US job growth figure pleases almost everyone
Last Friday, June 4, the Bureau of Labor Statistics (BLS) reported that the United States economy had created 559,000 new jobs in May. Meanwhile unemployment fell to 5.8% and average hourly earnings growth accelerated to 2.0% year-on-year. The job growth figure was “just right”, though slightly below consensus expectations. It created no major investor concerns in either the fixed income or the stock market, although wage inflation was higher than had been anticipated.
After last week’s employment report, markets are now focusing their attention on US inflation. This Thursday, June 10, the BLS will announce US inflation figures for May, with the year-on-year consumer price index (CPI) expected to reach 4.7%.
Biden blacklists more Chinese companies
On June 3, President Joe Biden issued an order that will ban Americans from investing in a total of 59 Chinese companies that the US says can be linked to China’s military or surveillance industry – nearly double the number on the earlier US blacklist. The list includes telecom giant Huawei and China’s biggest chip maker SMIC. The ban on new investments takes effect on August 2 and includes both stocks and bonds, as well as funds that own stakes in these companies. Existing investments will need to be divested within one year, after which all transactions will require special permission from the US Treasury Department.
Swedish home prices continued higher in May
New figures from Svensk Mäklarstatistik, which collects data from estate agents, show that home prices continued higher in May. Average prices of Swedish single-family homes rose by 2% while cooperative units (mainly flats) rose by 0.5% − year-on-year increases were 20% and 13% respectively. SEB’s own Housing Price Indicator, which measures the percentage of respondents who believe prices will rise minus those who expect them to fall, declined marginally in June from historically high levels. But the question remains: What can stop the surge in Swedish home prices?
Our market view
Recovery will support stock markets
The underlying stock market trend remains slightly positive, supported by relatively strong economic statistics. We are thus not making any changes in our market view below.
Partly due to worries about inflation, stock markets have paused to catch their breath, but this development should be seen in light of their strong performance earlier in the year. The upside surprises that predominated in corporate earnings reports for the first quarter were not generally rewarded by higher share prices, but they still provide hope for strong earnings growth ahead. Also contributing to such hopes are robust macroeconomic statistics, especially purchasing managers' indices.
Strong investor faith in a coming economic recovery is providing continued support to stock markets. Another contributing factor is that the upturn in US Treasury yields has levelled off. Most observers, including us, expect further small upturns in yields during 2021 and believe that sharp earnings increases among listed companies will provide sufficient support to share prices.
Excessively rapid and/or large yield increases may of course disturb this scenario. Likewise if production disruptions − such as the semiconductor and other component shortages reported by many companies − have an impact on corporate earnings. Despite these risks, we are sticking to our cautiously optimistic view of stock markets.
In our main scenario, we anticipate a clear economic recovery starting this spring or summer, with solid growth at least well into 2022.
In an economic recovery, cyclical value companies should be able to regain some lost ground, but looking further ahead the digitisation trend will continue to benefit growth companies. Sizeable worldwide investments in sustainability suggest that last year's strong performance for companies with this type of strategy may continue.
Share valuations today are undoubtedly high from a historical perspective, but can be justified by lower interest rates and bond yields as well as a strong earnings outlook. These high valuations limit upside potential in the long term, but they are rarely a good signal to sell in a short-term perspective.
Continued potential, though a lot has been priced in
Given today's low interest rates and yields, it is hard to find good alternatives to stock market returns. Meanwhile, central banks and governments have established a floor by promising continued stimulus.
This suggests that the growth picture will have to become much worse, causing downward adjustments in companies' earnings forecasts, and/or yields will have to climb much more than expected, for major stock market downturns to materialise. Recent market upturns naturally increase the risk of profit-taking, with downturns of 10% or perhaps 15%, yet we expect stock market indices to be a little higher this coming autumn than today.