So Easter is all about three things: chocolate, eggs, and eating yourself into a candy-induced coma. Right? Well, not exactly. The Egg is actually a symbol of rebirth and regeneration, with reference to the resurrection of Jesus in the Christian faith.
But will there be any resurrections in the markets this Easter? Are we seeing the next leg of the bull market looming on the horizon or are the bears coming out of the woods?
What’s up with the markets?
Markets are at an interesting turning point as analysts become more concerned about the strength and momentum of the 2019 bull market. The S&P 500 has gained a whopping 19.5% since the start of 2019 – one of the strongest Q1 starts in history.
This, of course, has been aided by the monumental October sell-off and positive developments in US-China trade relations, which helped markets bounce back at a significant speed. A more accommodative stance from the Federal Reserve in terms of interest rate hikes has also given global markets room to breathe, and taken excessive pressure off equity prices.
What are the bears saying?
On the flip-side, however, we’ve had rising uncertainty in Europe, the UK and Asian markets surrounding Brexit and a wider productivity and growth slowdown, all of which provide a significant counterweight to the mad bull market. So far, the US markets have managed to brush off the flood of bearish comments from the World Bank, IMF and various other agencies. But the chorus is getting louder and harder to ignore.
New Quarter, New Beginnings
The second quarter will be an important one where strong economic data will be needed to keep Q1’s momentum up. Corporate earnings have started off on the right foot, thanks to Wells Fargo and JP Morgan, boosting sentiment about the remainder of the earnings season to come – eggcellent! The trade war is also coming to a close, which has been a large source of uncertainty for markets for just short of a year.
Even though the trade deal with China misses a number of key issues such as subsidies and IP theft, a symbolic signing of a deal will be good for markets in Q2. This along with strong consistent earnings across the breadth of the market could be the reassuring sign investors are searching for to give them confidence in more gains for US equities past the S&P’s September high.
Emerging Markets (EMs)
On the emerging markets front, the resolution of the US-China trade war represents a serious driver for growth and stability. Moreover, the shift towards a flexible, but softer rates outlook by the Fed has given EM equities room to recover from a tough 2018. The coming months will be telling for EMs with a focus on how China’s fiscal stimulus and upcoming economic data filter through into asset prices.
Positive developments in China’s PMI, factory, inflation and factory data and a softening Dollar could generate significant upside for EMs. So watch the markets closely and don’t stray too far from your EM favourites!
Where’s the risk?
Don’t worry, risk is never too far away. However, The VIX volatility index is still rather subdued, and safe-havens, such as gold, have eased in recent weeks indicating a return to riskier asset classes. With central banks also leaning more on the dovish side, markets may well be allowed the space to ward off the doom and gloom of global growth.
Nevertheless, the weaker data coming out of Europe and select emerging market economies should not be ignored. If markets begin to falter and factory, housing, inflation and infrastructure data take a turn for the worse, the bad news may become harder and harder to brush off.
The mere fact that the Fed and other central banks have turned dovish is because there are still considerable risks to the global economy that should not be taken lightly. The bull market may live on, but the bears are multiplying in the woods.
Let’s hope the Easter bunny can bring the tasty market treats investors are after!