Status of US-Chinese trade talks
The twists and turns of the trade dispute continue to be the focus of market attention. Although recent signals have been predominantly upbeat, this picture is disrupted by apparent difficulties in assembling all the pieces of the puzzle. Also complicating things is that the pro-democracy protests in Hong Kong are being drawn into trade issues. US and Chinese statements are keeping the market's faith in a Phase 1 trade agreement alive. Worth noting is President Donald Trump's aversion (to date) towards signing Congress's Hong Kong bill, which declares that the United States supports the demonstrators.
Financial market optimism
Stock markets keep climbing, with America's S&P 500 and Nasdaq indices closing at all-time highs this week. Optimism about the economy has made a comeback. S&P Global Ratings declared on November 26 that US recession risks are again receding. The US Federal Reserve is also optimistic. Fed Chairman Jerome Powell said this week that there is "plenty of room" for the US labour market to continue creating new jobs and that the Fed will pursue a policy that facilitates increased labour force participation. The minutes of the latest Fed policy meeting confirmed that monetary policy will probably remain unchanged in the near term. The current euphoria coincides with a decline in volatility, which is now far below its historical averages for the fixed income, foreign exchange and stock markets. The big question is how much longer optimism and share prices will continue rising.
New Investment Outlook: Soft landing will support share prices
On November 26 we published our latest quarterly market view report, Investment Outlook, in which we explain why economic growth is decelerating and corporate earnings forecasts are being lowered but stock markets are still climbing to new record highs. In our view, the stock market appears to be excessively optimistic. Better economic conditions have largely been priced in already, limiting upside stock market potential in the near term. For tactical reasons, we thus prefer to hold a smaller proportion of equities than usual in our portfolios.
To read more, see the full report, which also includes two informative theme articles: We examine artificial intelligence – part of today's rapid digitisation trend – and take a close look at the forest product industry, focusing on its sustainable qualities.
All this plus a 2-page summary of the report can be found at https://seb.se/privat/private-banking/investment-outlook-in-english.
Our market view
Favourable corporate reports and signs of stabilisation in macroeconomic statistics have provided continued support to stock markets. A number of equity indices, including both the broad American S&P 500 and the narrower Swedish OMX index, have reached new highs. Signals from US-Chinese trade talks are also constructive, while the Brexit issue (British withdrawal from the European Union) has been pushed lower on the risk list.
Dovish signals from central banks are providing support, although after its October rate cut the US Federal Reserve (Fed) 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.
This autumn's macro statistics have reinforced the picture of continued global deceleration, but the most recent signals are pointing upward. Together with support from the Fed, this means that we foresee less risk of recession over the next couple of years. This applies especially to the US, where a continued solid labour market is helping to sustain growth.
The uncertain economic situation, along with rising share prices, is stretching market valuations further, suggesting price 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 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
This week's international statistical agenda is comparatively thin, and US markets are already starting to wind down ahead of Thanksgiving, which officially begins on Thursday. Black Friday retail sales and the mood of US consumers will be an important piece of the puzzle in determining whether we can expect a continued stock market rally in December.
Please contact your private banker if you have any questions or concerns.