8 May 2017

Not too hot, not too cold

The second quarter of 2017 has begun in generally positive terms for global equities, with the three main US indices continuing to push towards new highs and European markets rallying after both rounds of French elections which saw Emmanuel Macron installed as the new President.


For a brief few days ahead of the Easter break it looked like a market “correction” may have started but this was over before it had begun and volatility has returned to particularly low levels. 

I have been a market optimist throughout 2016 on the basis of what I saw as improving global economic momentum and the expectation of more supportive fiscal policies from the likes of President Trump. The base view of a gradual global recovery is unchanged but I certainly feel “less bullish” than was the case in January. This is due partly to the recent string of lukewarm economic readings, but more down to the fact that both market valuations and confidence appear particularly high.  There are possible vulnerabilities given the upcoming string of elections, not least our own in the UK, and in the event that the anticipated pickup in economic momentum does not occur as the year progresses, higher volatility would not be a surprise.

A gap has begun to open up between less encouraging “hard” economic indicators, such as underwhelming developed market Q1 GDP figures and commodity prices, compared to the still very encouraging “soft” indicators, such as consumer confidence and small business optimism in the US. Janet Yellen recently dismissed the soft Q1 readings as “transitory” and reiterated what seems the overwhelming consensus view at present that, “economic activity will expand at a moderate pace, labour market conditions will strengthen somewhat further, and inflation will stabilise around 2 per cent over the medium term”. Such a Goldilocks scenario would likely provide the foundations of ongoing progress in equity markets , nonetheless I feel that such a smooth transition would be an excellent result for the global economy and that some prudence is needed amidst the current wave of confidence. 

Fred Mahon is the fund manager of JM Finn’s Coleman Street Investments service. Click here for more information


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