“The equity rally has resumed,” says Rupert Thompson of wealth manager Kingswood. De-escalation in the Middle East and the prospect of a “phase one” US-China trade deal have helped lift the mood. Global equities are up by 12% over the last three months. December 2019’s “Santa rally” was particularly strong, notes The Economist, with America’s S&P 500 rising 2.9%. That index sets the mood for global markets. The FTSE All-World, a global stock gauge, had its best year since 2009 last year, returning 24% in dollar terms.
Why stocks are still appealing
When even the threat of war doesn’t dim animal spirits you know the bulls are out in force, says Michael Mackenzie in the Financial Times. Late last year expectations coalesced around “a global economic rebound”. A “flurry” of stock buying in the final quarter helped drive the MSCI All-World index to a record high. For all the risks, “owning stocks and other risky assets is still very appealing” given historically low bond yields.
Falling interest rates played a starring role in last year’s gains, says The Economist. The Federal Reserve cut rates three times, a more rapid loosening than many had expected. The end of year trade truce between Washington and Beijing also calmed nerves. Yet global growth is sluggish and US stocks remain very expensive. The S&P 500 price/earnings multiple is 21.6, far above the long-run average of 16. Last year’s “potent combination of monetary easing” and falling geopolitical risk “seems largely played out”. That could limit further gains. Analysts have been out in force making rosy predictions for 2020, but investors should be wary of “falling foul of the optimistic outlook”, says Sam Benstead in The Daily Telegraph. “When consensus emerges among experts about the direction of stockmarkets”, it is sometimes “a signal that something unexpected [will] happen.”
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Watch out for wages
Last year’s stock gains were driven by higher valuations rather than better corporate profits, says Thompson. Most analysts are predicting “zero earnings growth for the second quarter running” as the US fourth-quarter earnings season gets under way. That is a problem because, with valuations already so stretched, further stockmarket gains will depend on “a revival in earnings growth”. Why was 2019 earnings growth so poor even as the economy expanded? Blame higher labour costs, says Michael Wilson of Morgan Stanley. US unemployment is at its lowest level since 1969, so workers are in a strong negotiating position.
The biggest “macro risk” for the bull market this year is a sudden jump in inflation, says Will Denyer for Gavekal Research. That could come either from a “profit-killing surge in labour costs” or a “steep rise in energy prices”, perhaps caused by conflict with Iran. Yet Middle Eastern tensions have simmered down and American wage growth actually slowed towards the end of last year. The conclusion? Be bullish about stocks in 2020, “but cautiously so”.
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