Following Friday’s FTSE 100 all-time high, George Lagarias, Chief Economist at Mazars looks at how the wider economic performance is somewhat in contrast to this with hawkish central banks and fears of an earnings recession.
He said: “Equity and bond markets continue to rally, with the FTSE 100 hitting all-time highs last week.
“However, the economic realities of last week are in antithesis with this bull market. In the past fifteen days, the Fed raised rates into a cooling economy and warned markets that it will continue to do so in the coming months. Friday’s great US jobs data will only reinforce the central bank’s hawkishness. The Fed was followed by equally hawkish central banks in Europe and the UK. Meanwhile, US bank and Megatech earnings disappointed. Despite the IMF’s somewhat brighter outlook, top S&P 500 companies are firing workers, fearing an earnings recession. Earnings analysts warn that present valuations are low, and earnings could fall in the coming quarter as they don’t encompass the type of significant deterioration (10%-18%) we would see in a recession. At the same time, Asia is rocked by what could possibly prove to be one the biggest corporate scandals in history. And let us not forget that the Fed continues to siphon money from markets at an increased pace.
“Why the dichotomy? One reason could be just plain old optimism, coupled with algorithmic trading.
“The other reason could be a little more surprising. Money managers are always telling investors to invest more when valuations are low. What if this is what is happening? After all, we are not seeing another tech-driven rally, but rather an overall buoyant market affecting value as well as growth.
“We feel that the answer is probably a mix of those conditions. What’s more important is that in this market we expect bull-runs and pullbacks more often than in the past.
“Barring a serious financial accident in the next twelve months, the single-course low-volatility market may be consigned to the past. We have moved from a uniform and unipolar market to a multipolar one and one thing is beginning to become clear: The future is not about beta (passive investing) anymore, but Alpha, finding the best managers and the best points of view in what is now a polyphonic market.”