March 15 2019

This Bottoming-out Feeling

The mood in 2019 is resolutely more cautious than previous years, as everybody agrees we are in the late cycle of a long economic bull run. From late 2018, PMI started sagging, global growth slowed down, and corporate earnings were forecast to grow less strongly.

But central banks worldwide didn’t let the downturn fully start to materialize.

Even in presence of still strong consumer confidence, strong job creation, and absence of household credit stress, the US Fed decided to turn neutral on their rate policy. Frankly, it seems they took the sharp drop in stock indices in December 2018 as a forerunner sign of bad things to come, while their mission should be indexed on inflation and actual economic activity, really.

China let a little more of the downturn sink in (PMI were already in contraction mode since Nov18, and onshore defaults rose to a 6-year peak in FY18) before also turning the monetary tap on. Result is that real-estate investment roared back (+11.6% yoy in Feb19) and growth forecast just increased back above 6% for the rest of the year.

Markets can’t be happier in such a flush liquidity scenario with cheap rates worldwide, and they proved it with a 12% rally in S&P500 YTD19. But mind you that turning neutral to negative on rates so soon is not such a great news after all. Fed rates are at 2.5% compared to a 50-year average of 5%, which means there is not so much room for easing anyway.

When fiscal and monetary measures are exhausted, the bottoming out may more look like a dead-cat bounce.

360 Advisory – Markets