Fidelity Insights….July 2017
Bull market still intact but late stage
Global growth moderating, but earnings outlook is positive
Leadership has swung back to quality growth stocks
The risk of policy mistakes remains elevated
Key drivers of bond markets: central bank policy, inflation and outlook for China
Bull markets are born on pessimism and die on euphoria. By that yardstick, the current bull market - already one of the longest on record - has further to go. Many investors remain cautious and uncommitted; this has been one of the most miserable and loathed bull markets in memory. Yet, this feature helps to explain its remarkable longevity. Bull markets end only after the last buyers are flushed out, but there is abundant cash on the side-lines. We are not seeing the kind of ‘cult of equity’ or FOMO (fear of missing out) behaviour evident in previous market tops. Market progress is being underpinned by better earnings growth.
We see three key themes for the third quarter of 2017:
1. The bull market is intact but beginning to look stretched
The bull market is still running, but nervousness over when and how it might end is consuming investors. And not without justification; we have travelled a long way in the current cycle. The 99 months since March 2009 mark the second-longest bull market since the Second World War. Many of the issues holding back equities have been addressed and markets have risen considerably. While we are not yet at the top, investors should start preparing for it happening in the next 12-18 months.
Source: Fidelity International, Thomson Reuters, 16 June 2017. Based on the S&P500 Index. 2. Earnings growth is underpinning equity markets for now - Europe most attractive
Earnings growth is supporting equity markets. We are not seeing valuations becoming detached from earnings to the worrying extent evident in previous market tops like the 2001 dot-com bubble. Europe, in particular, is benefiting from a catch-up effect in both economic and earnings growth now that political worries have faded. European earnings revisions have turned firmly positive - in fact, they haven’t been this positive in five years; earnings growth and revenue estimates are now outpacing the US.
Source: Fidelity Earnings Forecasts, Fidelity Insight, Fidelity International, June 2017. 3. China and inflation are the key factors to monitor
US inflation has been unusually weak for three consecutive months - but it didn’t stop the Federal Reserve hiking rates at their June meeting. Chair Janet Yellen believes the inflation weakness will prove temporary. Sustained weakness would raise questions about the state of the US economy, so US growth and inflation data will be keenly anticipated and analysed.
Meanwhile, China is trying to cool certain areas of its economy and improve financial transparency. We are seeing a tightening of regulations and financial conditions in the banking sector and credit growth has slowed. We see GDP growth slowing to c.6.5%, but investors will want confirmation that any kind of harder landing has been avoided.