In the United States, the core Personal Consumption Expenditure (PCE) price index – the Federal Reserve’s preferred inflation metric – rose by a faster-than-expected 3.1% in the year to April, but this announcement on May 28 did not lead to any short-term market volatility. Ten-year US Treasury yields remain at around 1.6%. On Friday, June 4, US employment statistics for May will be released.
Biden’s new budget proposal
Last week President Joe Biden unveiled a US federal budget bill calling for expenditures to increase to USD 6 trillion during the fiscal year starting in October 2021. The proposal would provide large new investments for education, transport and fighting climate change. It would lead to budget deficits totalling 17% of gross domestic product (GDP) this year and nearly 8% in 2022. These forecasts assume low inflation as well as very low interest rates and bond yields ahead.
The latest United Nations climate report
A new climate report from the World Meteorological Organisation (WMO), a UN agency, indicates that there is about a 40% probability that annual average global temperature will rise beyond 1.5 degrees C above pre-industrial levels in at least one of the next five years. The same report predicts a 90% likelihood that at least one year during 2021-2025 will be the warmest ever measured.
Sweden’s pandemic restrictions to ease
Finally! At a press conference on May 27, the Swedish government presented its plan for successively lifting restrictions in five stages, as a response to an overall decline in the number of new COVID-19 infections. The first stage begins today, June 1, followed by further easing during the summer and early autumn. The measures include longer opening hours for restaurants and cafes, as well as raising the number of spectators at sports events and visitors at museums and amusement parks. No definitive date has been set for ending all restrictions.
However, Vietnam and the United Kingdom have reported new COVID mutations and surges in transmission – underscoring that the goal of finally conquering the virus remains elusive.
Our market view
Recovery will support stock markets
Due in part 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.