US Treasury yields have stabilised again after unexpected movements
American share prices reached new record levels last Thursday, April 15, after US retail sales posted large gains. With pandemic-related restrictions easing, households appear willing to spend much of their latest federal stimulus payments. Meanwhile 10-year US Treasury yields plunged in response to the strong retail figures. This sharp decline was both unexpected and puzzling to most market observers. Among suggested explanations are profit-taking by investors, increased geopolitical uncertainty and purchases of US Treasuries by foreigners. The 10-year Treasury yield has recovered after last week’s slide and is now back at the same levels as before, around 1.6%.
New report on currency manipulators
On April 15, US Treasury Secretary Janet Yellen presented her department’s periodic report on countries that weaken their currency in order to improve their position when trading with the United States. Taiwan and Thailand have been added to the list, but the US has chosen to remove Switzerland and Vietnam − thereby reversing the Trump administration’s decision last December to single out these countries.
A heavy dose of company reports during the coming weeks
The quarterly report season began in the United States last week, including some positive reports from the financial service sector. In Sweden, many companies will announce their quarterly earnings starting this week. There are many indications that this will be a strong report season, with solid data both at the corporate and macroeconomic levels. This could contribute to higher share prices in a short-term perspective. It will be interesting to see which companies have been adversely affected by supply bottlenecks and cost increases, as well as how they manage these problems and how the stock market reacts.
Swedish home prices keep climbing
Valueguard’s March figures confirm a continued upturn in Swedish home prices. Prices of tenant-owned (co-op) units rose by 1% compared to the previous month, while single-family houses were up by nearly 3%, for a total increase of about 2%. Indicative metrics for April are showing a continued weak upturn. Compared to February 2020, single-family houses are nearly 20% higher while co-op units (mostly flats) are “only” a bit more than 6% higher.
Our market view
Recovery will support stock markets
Company reports are likely to dominate stock markets in the coming weeks. Strong economic growth signals, resulting in upwardly revised earnings forecasts, suggest a favourable share price trend, although component shortages may be creating problems for some companies – especially in the manufacturing sector. We remain relatively upbeat about stock markets, as explained below.
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 somewhat this past week. 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. The quarterly report season that has now begun will be important to future share prices. Despite these risks and recent price upturns, 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.