An unexpectedly good October
October turned out to be an unexpectedly good stock market month, sustained by more stable macroeconomic conditions, progress in trade negotiations and better corporate earnings than had been feared. America's broad S&P 500 equity index rose 2% while the more tech-heavy Nasdaq Composite gained 3.7% (both in USD). Sweden's OMXS30 index gained about 5.5% (in SEK) last month.
The MSCI World Index (in USD) is now up 18% so far this year, and both Sweden's OMXS30 and America's S&P 500 index have reached new all-time highs.
Thaw on the trade front
Since the planned APEC summit in Chile was cancelled, President Donald Trump is now aiming instead at a meeting with his Chinese counterpart Xi Jinping in the United States later in November to sign a "Phase One" trade agreement. According to media sources, the US is also open to withdrawing some of the tariffs previously imposed on imports from China in order to facilitate the partial agreement.
Commerce Secretary Wilbur Ross also said that the US may not need to impose new auto tariffs as previously threatened, which would mainly have affected the European Union and Japan. But negotiations with the EU are slow-moving, since the US also wants to include farm products – a sensitive issue for many EU countries. In general, Trump seems to have softened his stance somewhat on trade issues. This may also reflect concerns about hurting the US economy and consumption. Getting good ratings from voters should be especially important during the coming election year and a looming presidential impeachment process.
A little more growth and a little less inflation
The slowdown in the growth of US gross domestic product (GDP) is decelerating, and annualised third quarter 2019 growth was 1.9%. In the euro area, growth was 1.1% and for all current EU countries (the EU28) it was 1.4%. Overall, growth figures were a little better than expected in both Europe and the US. Economic growth in the US is expected to continue slowing next year, while European growth levels off.
Euro area inflation was 0.7%, the lowest in three years and far below the European Central Bank's target of just below 2%. Core inflation rose marginally but remains around 1%.
US job growth slowed less than expected in October. Continued strong employment and moderate pay increases helped boost American share indices to new all-time highs.
The Fed cut its key rate as expected and is signalling a pause
The US Federal Reserve lowered its key interest rate for the third time this year to the 1.50-1.75% range. The Fed stuck to its message that this was a temporary downward adjustment and that a sizeable inflation upturn will be required before the central bank even considers a rate hike. This decreases the risk that rising interest rates and bond yields will put an end to the stock market rally. Our forecast is one more "insurance" rate cut in January followed by a pause.
Our market view
Favourable corporate reports and signs of stabilisation in macroeconomic statistics have provided continued support to stock markets. Signals from US-Chinese trade talks are also constructive, with new tariff hikes being postponed, while the Brexit issue (British withdrawal from the EU) has been pushed lower on the risk list.
Dovish signals from central banks are providing support, although after last week's rate cut the US Federal Reserve is now signalling that it will await coming economic developments. Long-term bond yields have rebounded after this year's sharp downturn, but they remain at extremely low levels. The overall outcome has been that share prices rose markedly during October, with gains of 2-4% in the US and 5-8% in Europe. In recent days, both the broad American S&P 500 index and the narrower Swedish OMX index reached new highs.
Recent macro statistics point to continued global deceleration, but at a slower pace than feared. This applies especially to the US, where a continued solid labour market is helping sustain growth. In Europe, where economic expansion has slowed more sharply this year (especially in manufacturing) we are seeing signs of what may be a stabilisation in growth.
The uncertain economic situation, along with rising share prices, is stretching market valuations, suggesting more fluctuations ahead. The lack of investment alternatives (due to extremely low interest rates and bond yields) and decreased risks related to both growth and trade problems may nevertheless provide continued support to stock markets.
We have a continued cautious attitude towards stock markets in the near term. Better (less bad) economic statistics and corporate reports that are better than previously feared are on the plus side, but with stock market indices at or near new all-time highs there is an obvious risk that good news is already largely priced in.
This week's agenda
- Nov 5 – United States, ISM non-manufacturing index
The Institute for Supply Management's purchasing managers' index for non-manufacturing sectors has trended downward since September 2018. We and the market expected a slight recovery in October to 53.5, but the index climbed to 54.7.
- Nov 7 – Sweden, home prices (SCB)
According to Statistics Sweden (SCB), prices fell starting in mid-2017 but have recovered in the past 3-6 months. The SEB Housing Price Indicator is pointing towards continued price increases.
- Nov 7 – United Kingdom, central bank policy meeting
The Bank of England is expected to leave its key interest rate unchanged at 0.75% and indicate that the next change will be a rate hike, which we do not believe.
Please contact your private banker if you have any questions or concerns