Equity markets rallied strongly in the first part of 2019, with the S&P 500 staging a 26% rally from its low on Christmas Eve to the recent peak on May 1st, but failure to resolve US-China trade disputes has somewhat dampened investors’ optimism. Strategically we remain cautious but slightly positive, as the probability of a deal being reached within a reasonable timeframe is over 50%. Some political pushing, shoving, exchange of words for electoral gains might take place in the interim. Meanwhile fundamentals, especially in the US, remain fairly positive:
– The growth rate in the US is above expectations
– Inflation is under control, but perhaps below average
– Corporate profits are expected to be slightly negative for the quarter, but less negative than initially expected
– Valuations are fine. At USD172 forward earnings a market P/E of 17 looks reasonable. It is slightly above historical average but at the same time the interest rates are well below historical average!
– The earnings yield of 6pct still compares favorably to interest rates of about 2.5 pct !
– The yield curve is flattish but not inverted.
– Fears of an abrupt slowdown of Q4 2018 did not materialize.
– A trade agreement with China looks very plausible.
– The FED appears less hawkish and the fight with the administration looks less pronounced.
– China and Emerging markets exhibit good growth rates although Europe is rather disappointing.
Strategically we aim to capture the long run 4-6% annual outperformance of stocks over bonds, and leave market timing to the amateurs. Great investors are not attempting to time the market but are interested in the 4-6% equity premium and in their ability invest in a few undervalued situations. We aim to be diversified with a disciplined asset allocation and ready to take advantage of opportunities as they arise.
Best of luck to all of us.
The views and information presented are for informational purposes only and do not constitute investment advice or a recommendation. Investment decisions should take into account each investor’s objectives, financial circumstances, risk tolerance, liquidity requirements and investment horizon.
