Investors decide the bull market is back

River Seine in Paris © iStockphotos
France is once again offering a yield on its ten-year bonds

“The pendulum is swinging back”, says Michael Mackenzie in the Financial Times. Investors have spent much of this year worrying that the US-China trade war would trigger a “hard landing” for the global economy. Yet though a trade resolution remains murky, markets have suddenly decided that it is time to be bullish. America’s S&P 500 has now made five straight weeks of gains, its joint-longest winning streak for two years, notes Stan Choe for The Associated Press. The FTSE All-World index has gained more than 4% in the past month.

The flight from safety

Perhaps more significantly, investors have also been baling out of safe-haven assets. The ten-year US treasury yield is now up to 1.94% from a low of 1.50% just last month. The yields on ten-year French and Belgian government bonds turned positive for the first time since mid-July last week.Positive sentiment has also taken its toll on gold, the ultimate safe haven. The yellow metal has fallen to a three-month low, although it remains up more than 12% for the year-to-date.

The real surprise is that this rally comes against the backdrop of underwhelming US corporate earnings, says Alexandra Scaggs in Barron’s. S&P 500 earnings per share are set to decline for the first time since 2016 in the third quarter. That matters because stock valuations are fundamentally based on the profits of the underlying businesses. All else being equal, “when earnings decline, stocks should fall in turn”. Yet most analysts have now called a bottom to the earnings slump, says Gunjan Banerji in The Wall Street Journal. Many on Wall Street expect earnings growth to accelerate next year and the US economy to dodge a recession. That is keeping markets in buoyant spirits for now.

Buy high, sell high

The latest moves are less a matter of optimism than of “relief that things aren’t getting any worse”, says Robert Burgess on Bloomberg. Far from a case of euphoria, investors are showing “almost unprecedented restraint”. Data from the Investment Company Institute shows that US investors have poured “almost half a trillion dollars into cash” this year, the largest such inflow since the 2008 financial crisis. Yet studies crunching information all the way back to the 1920s suggest that those who buy into stock indexes when they hit record highs are more often than not rewarded with superior risk-adjusted returns. It wouldn’t be the first time that this decade-long equity bull market has reasserted itself, says Gavyn Davies in the FT. There have been several transient phases of weakness over the past decade, particularly 2011-14 and again in 2016-18. Both periods ended with “extremely powerful surges in risk assets”.

With central banks back in loosening mode there is plenty of money sloshing around markets. On the other hand, global growth is materially weaker this time as China de-leverages its shadow banks. That could make this rally a tepid affair. “Equity returns next year may be adequate, but not great.”