The running of the bulls
Over the last 30 years the Australian and US share markets have risen by an average of about 9.5% per annum, including dividends. Over the last 12 months they have returned 22% and 25% respectively. At some point, and there’s no one on the planet who can tell you with any degree of genuine confidence when, we will see mean reversion. In the meantime, enjoy the ride and, as the saying goes, feed the ducks while they’re quacking.
It’s not just Australia and the US either, over the past 12 months the UK’s FTSE is up 24%, Germany’s DAX is up 22%, and even Japan is up 22%. In fact the MSCI All Country World Index closed at a record high – see the chart below. Commodities prices have risen strongly over the past year as well, for example oil is up 56%, iron ore 83% and copper 24%. The bulls are on the loose and gorging on animal spirits.
The All Country World Index hit a record high during February
The US’s Dow Jones Index enjoyed 11 consecutive up days in the second half of the month, something that hasn’t happened since 1987. We suggested this market rally started on the back of very expansionary monetary and fiscal policies that took some time to gather momentum and has since gained an added tailwind from investors latching on to the Trumponomics narrative. Various measures of US manufacturing activity have hit multi year highs and in fact one leaped to its largest monthly gain in eight years backed by record monthly gains in small business confidence. All pretty heady stuff.
Along with the resurgent US manufacturing sector, measures of manufacturing activity in Europe, China and Japan have all hit multi year highs over the past couple of months as well. As we’ve said previously, there is no way these international indices are responding to Trumponomics. For example, in China corporate loans hit a record high in January at more than RMB1.5 trillion, an almost 50% increase on the previous year and up 2.5 times in two years! That is what you call aggressive monetary expansion.
But, and there’s always a but, there are now many indicators that are trading at extreme levels, so some caution is warranted. During the month the S&P500 recorded its longest ever streak without a 1% intraday move; such low volatility is often seen as an indication of being too complacent, after all, as share prices go up so does the risk that they’ll fall back down. One indicator of this is below, which purports to measure the market’s complacency by looking at how volatile the S&P500 index is compared with how expensive it is as measured by the price to earnings (PE) ratio. The theory is that if people are becoming less worried as prices rise then risk is going up. As the chart shows, complacency is at its highest level since they started tracking it some 27 years ago. Likewise the chart shows that when caution returns it tends to do so suddenly rather than gradually.
Source: Deutsche Bank
Another indicator which is interesting because it looks forward is the US survey of commercial banks’ willingness to lend to consumers, which fell to the lowest level since the GFC. Another interesting forward looking indicator is in the chart below, which shows the companies listed in the S&P500 have been reducing their work forces over the past 12 months.
US companies have sharply slowed their rate of
employment growth over the past 12 months
Source: Deutsche Bank
There’s nothing specific you can point to at the moment that’s flashing warning signals, like home loans or ridiculously overpriced tech shares, but there will be something that trips the market over.
With the US enjoying such buoyant economic conditions it’s hardly surprising that markets are now factoring a much higher likelihood of the US Federal Reserve raising interest rates in either its March or May meetings. While the US equities markets seem to be shrugging that off, it’s another sign that the expansionary policy spigots are being closed off.
Australia: a healthy reporting season
February of course sees Australian listed companies report their interim results. After 90% of reports it appears they’ve enjoyed a healthy overall increase in profits: 59% saw profits rise from a year ago and 46% beat expectations, which is above the average of 44%. This has seen the full financial year forecasts for the whole market increased to a 19% gain, driven mostly by resources companies that are benefiting from resurgent commodities prices.
Echoing those strong corporate results the NAB Business Survey saw confidence jump to the highest in three years with general conditions seeing the biggest monthly rise in almost 10 years.
Australian business confidence
Source: Trading Economics
However, the lift in business conditions and confidence is not reflected in wages, as shown in the chart below, which illustrates that growth has been trending downwards since the GFC. It is that kind of decline in spending power, reflected by the red line showing household consumption, at a time of rising corporate profits that causes voters to become angry and disillusioned. In case we needed another reminder.
A 10 year downward trend in real wages and salaries
and household consumption could contribute to
voters getting angry and disillusioned…
Source: Deutsche Bank