Spring is here and the economy is blossoming, says Randall Forsyth in Barron’s. Mass vaccination and “trillions of dollars of fiscal and monetary Miracle-Gro” have nourished the economy’s green shoots. US GDP is expanding at a 6% annual rate; jobs growth has surpassed expectations. Retail sales rose by 9.8% month-on-month in March as Americans spent their stimulus cheques.
Signs of a global recovery are especially clear in manufacturing, says Jim O’Neill in Project Syndicate. The US manufacturing purchasing managers index (PMI) has recorded its highest reading since 1983. The eurozone equivalent hit the highest level in the bloc’s 22-year history, while the UK manufacturing PMI rose to a ten-year high.
Inflation emerges
Global markets have been basking in the recovery. America’s S&P 500 and Dow indices both finished last week at record highs following four straight weeks of gains. The pan-European Stoxx 600 hit a new record peak on Monday morning. The FTSE 100 has eclipsed 7,000 (see page 5).
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Markets did fall back slightly at the beginning of this week, report Naomi Rovnick and Colby Smith in the Financial Times. A worsening Covid-19 situation in places such as India and Brazil has raised doubts about whether the global recovery is really secure. Yuko Takano of Newton Investment Management adds that markets have now priced in all the good news about vaccines and stimulus. They need “something new to look forward to”.
The first signs of price rises have also started to emerge. Annual US inflation hit 2.6% in March, a significant rise from February’s reading of 1.7%. You would have bet that bond markets would panic at the news, but in the event they shrugged, says John Authers on Bloomberg. The inflation spike was driven by the recovery in oil prices, which plunged below zero one year ago this week. Stripping out oil and food, “core” inflation remains under control for now. The consensus is that the US is heading for inflation a little over target over the next five years, but investors are not yet betting on an outright “regime shift” that takes us back to the 1970s.
The S&P 500 is up by 87% since its nadir in March last year and the bull market has never looked healthier, says Caitlin McCabe in The Wall Street Journal. The initial rebound was driven by technology stocks. Yet this year other sectors have risen. A “broader” market rally usually has further to run than one dependent on a few stocks.
How much longer?
With interest rates pinned to the floor and central bankers still gorging themselves on bonds, there is little prospect of markets rolling over, says Ambrose Evans-Pritchard in The Daily Telegraph. There are a few signs of cooling sentiment: appetite for newly floated businesses is not what it was, as shown by the Deliveroo flop. Geopolitical risks are worsening (see page 14). Inflation is another worry. Yet for now, none of that is likely to put a dent in the bull market. “Great equity booms” can go on “for a year or 18 months longer than a nervous rationalist believes possible.”
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