Markets are heading into the final weeks of the year with some extraordinary gains for the year to date. November proved to be another strong month for risk assets, led by equities and in particular the US, up 3.6% for the month, taking its return so far this year to 26.9%. The contrast with the fourth quarter of last year, when Wall Street fell 20%, could not be more stark, and reflects to a large degree the policy pivot by the Fed, followed by other central banks, from tightening to easing policy. Markets have shrugged off the sharp downturn in global trade and manufacturing, as well as a tough year for corporate profits, which have been broadly flat, and have recovered all the ground lost in that sharp setback of Q4 2018. While the US has led the way and has reached a new all-time high other equity markets have also performed well: Europe ex UK gained 2.6% in November, 25.1% this year so far, while even the laggards among developed markets, Japan and the UK, have gained 16.4% and 13.3% respectively this year, after solid returns in November. The MSCI World index, dominated as it is by the US, was up 2.8% in the month, 24.0% year to date.
Risk assets made further progress in October, with equities leading the way. Wall Street gained 2.1% and reached a new all-time high, but, as in September, the best returns came outside the US: Japan was up by 5%, Asia ex-Japan by 4.5% and emerging markets by 4.2%. Among the major markets, only the UK was down (-2.1%) as a strong rally in sterling put pressure on the big overseas earners, which dominate the UK stock market. The improved appetite for risk was reflected in bond markets, with safe-haven government bonds flat or down while credit markets produced positive returns, led by US corporate bonds up 0.6%.
After the spike in volatility in August, markets returned to a semblance of stability in September, but this masked some big underlying shifts across and within asset classes. Most notable was a sharp reversal early in the month of bond yields, which until then had trended inexorably lower throughout 2019: the yield on 10 year US Treasuries moved from below 1.5% at the beginning of the month to 1.9% within a matter of days. Somewhat more positive economic data and an apparent thawing of trade war rhetoric between the US and China proved to be the trigger for a reversal of some of the big bond moves seen in August, and risk appetite picked up.
The nervousness which had been creeping into markets during July intensified in August, with growing fears of a more broadly based global economic slowdown than the manufacturing contraction evidenced in the past 9 months. Equities fell sharply across the board, with the largest falls in the most economically exposed sectors and financials, the latter suffering from the dramatic shift down in interest rate expectations in recent weeks. In contrast, safe-haven government bond markets rose sharply, taking yields in many cases to new all-time lows. In the same vein, industrial commodity prices fell sharply, with the key iron ore price falling by 24% in the month, whereas precious metals rose; gold was up 7.5% in August, taking its rise this year to 19%, while silver did some catching up with gold, rising 13% in the month, bringing its rise this year in line with gold.
While most markets extended their gains in July and Wall Street reached new all-time highs, the moves were more muted than in the first half of the year, with some markets falling, notably in Asia, taking the Emerging Markets index down 1.2%. Gains that were made were modest, with the UK the biggest gainer in local currency terms, up 2.1%, but this was driven largely by a sharp fall in sterling which benefits the big listed offshore earners which dominate the UK stock market. Government bonds were generally firm as yields drifted lower while credit markets performed well with investment-grade corporate and high yield bonds each returning 0.6% and emerging market debt 0.8% in the month, taking a year to date returns for all 3 sectors into double digits.
The trade war-inspired sell-off in equity markets in May rapidly reversed in June, while yields on bonds continued the decline that started in late 2018, leaving nearly all asset classes in positive territory for the month. The US again led the way, returning 7.0% in June, taking the MSCI World index up 6.6%, while emerging markets participated fully in the rise, returning 6.2%. The notable laggard was Japan, up only 2.8%, while the UK was held back by Brexit worries, returning 4.0%. Bond markets also rallied strongly with most gaining 1-2% or in the case of emerging market bonds 4.1%.
To say we are living through extraordinary times is beyond dispute. The current economic expansion in the US is soon set to become the longest in history, employment growth in the US and elsewhere has been very strong, monetary policy across the developed world remains ultra-loose by any historical standard and yet inflation is still remarkably subdued. Indeed, recent falls in core inflation measures especially in the US have rattled investors and raised fears of weaker growth and tougher conditions for the corporate sector ahead, and in Europe and Japan of prolonged deflation. US inflation as measured by core PCE deflator has fallen to 1.6%, well below the Fed’s target of 2%, which has hardly been breached throughout the post crisis decade.
The extraordinary start to 2019 for global financial markets continued into April, with strong rises in most risk assets, led by equities, which have enjoyed their best start to a year in decades. All the major equity markets produced solid positive returns with developed equities again outperforming emerging markets, returning 3.5% versus 2.1%. US equities returned 4% in US dollar terms and hit another record high late in the month. The strong performance in the US was however exceeded by Europe, advancing 4.3% in euro terms, buoyed by signs that the sharp slowdown in growth across the eurozone was stabilising. Japan again underperformed, up 1.7% in April and 9.5% year-to-date, the latter making up half of the returns of the US (18%) and Europe (17.2%). Japan has been held back by slower growth this year, below 1% per annum, hurt by the slowdown in China and softness in global growth. The market’s underperformance leaves it attractively valued relative to other developed markets. China was the only market of note which slipped in April, however, this has followed a very strong first quarter performance, returning close to 30%.
Equity markets made further progress in March, despite a return to higher levels of volatility as concerns about the slowdown in global growth intensified. Developed market equities returned 1.3% over the month, taking the Q1 2019 return to 12.5% and recovering much of the ground lost in Q4 2018. US equities advanced 1.9%, supported by encouraging signs of progress in US-China trade talks and the increasingly accommodative stance of the Federal Reserve. In US dollar terms, Japanese equities underperformed the other major regions returning 0.6% while emerging markets returned 0.8%. Despite ongoing Brexit related uncertainty, the UK was a notable outperformer, up over 3% in sterling terms, with the UK’s big overseas earning companies boosted by weakness in the pound during the month.
The Federal Reserve inspired recovery in equity markets following the Q4 2018 sell-off, continued through February, albeit on a more mixed and less dramatic basis than January. European equities led the way with a return of 4.1% in euro terms, taking its recovery since the December low to 14%.
The US and Japanese markets broadly kept pace with Europe in February. US equities returned 3.1%, taking its recovery since the December low to 19% and leaving it only 4% off its all-time high. The major laggard was the UK, which returned 2.3% in February and 8% from its December low, held back by Brexit uncertainty and sterling strength, an important factor for UK stocks given that some 75% of listed company revenues are derived offshore. The MSCI World index returned 3% on the month and is up 17% from its December low.