Whats new pussy cat

Almost every economic commentary you listen to or read has the conflict in Iran as its headline, I guess with good reason, trying to decipher what impact it’s having on the global economy and then by definition the stock and bond market. In a nutshell, it is simple, oil down, peace talks back on, stock and bond markets up. Oil up, peace talks off, no oil getting through, stocks down, and bonds down. Having said all that, stocks are back to all-time highs. Why, I hear you asking, and with good reason. Let’s analyse what’s changed and maybe what’s not.

Oil prices are down from the peak but are still significantly higher than before the war. Stock markets may have rallied, but not so much the US Treasury markets. It’s still tricky to send a boat down the Strait; Trump is as unpredictable as ever; on the plus side, there appears to be a truce, with hopes that peace talks will resume. What has changed is the perception of the outcome; markets initially feared the worst, but now hope for the best. Short-term inflation expectations have risen, but the longer-term perspective has not; the 10-Year Breakeven Inflation Rate has hardly moved.

Whereas there was a fear a few weeks ago that the Fed could raise interest rates, economists now hope there is a case again for the Fed to cut before the year’s end. Andrew Bailey said yesterday that there will be no rush to change interest rates, warning of “really difficult judgments” ahead to balance another surge in inflation with the wider needs of the economy, by which he means an economy struggling to grow. That is despite a slightly better GDP report for February. I did express the view that the Bank of England would not raise interest rates.

Earnings season is likely to be supportive, and although valuations are still expensive, they are not quite as high as they were. So investors start drinking the Kool-Aid again. The bottom line is that although there could be an impact from the events of the past few weeks, the consensus view, as things stand now, does not appear to be enough to knock the global economy into a recession, and if that is the case, stocks are once again the place to be.

Sell in May and go away, I hear you cry, not that it works very often. The rally has been notable for its speed. According to a Bloomberg report, since the close on March 30, the S&P and Nasdaq are up 10.7% and 14.2%, respectively. Since 1950, this is only the 21st time that the S&P has managed a 10% rally this fast. So, not unheard of but not a regular occurrence; again, according to Bloomberg, the outlook for the next six months has been overwhelmingly positive.  Following these specific occasions, the average return for the remainder of the year was approximately 4.8%.

Enjoy the weekend the sun is supposed to be shining, summer may be approaching