Global stock markets are doing better than the general economy, which supports the view that we will see economic activity improve in the second half of the year. Certain leading indicators have started to produce some green shoots, and commodities like steel and oil have held support levels.
Under this scenario we should see equity markets primarily driven by multiple expansion until the economy and earnings catch up, which can be a risky proposition if markets get too far ahead of themselves. International developed and emerging market PE’s are both below historic averages, so there is room to move higher, and the U.S. is selling just slightly above historic PE’s in the 17X range, somewhat mitigating valuation risk. Europe and Japan are still weak, but they can piggyback on US and Chinese economic growth, which should accelerate concurrent with a trade deal and Chinese fiscal stimulus.
Overall the market has priced in many of these expectations, and going forward we need certain events to occur in order to ensure a global soft landing: the U.S./Mexico border must remain open, no new EU tariffs, a soft and orderly Brexit, Japanese fiscal stimulus ahead of the new VAT tax, continued China fiscal stimulus, an accommodative Fed, a debt ceiling resolution and tempered aggression from the House regarding impeachment.
Volatility has disappeared again, which we know can last for protracted periods of time but also sets us up for negative surprises. Given that most global equity markets are up 15% or more year-to-date, it’s hard to make the case for significant additional upside until the economy and earnings catch up. Please call or email me with any questions.
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