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A Spring Conundrum - Is the glass half way full or empty?

The rites of Spring are upon us. Against a backdrop of positive economic and company news, the financial markets remain extremely volatile. The mood in the markets is one of pessimism where only the negative news is being considered in search for the source of the next financial meltdown.

The culprits vary from political concerns such as;

  • Unrest in the Middle East and its waning influence on oil prices

  • Chinese expansionist aspirations on the new Silk Road and the Pacific

  • Suspected Russian meddling in elections of Western nations

  • The trade dispute between Trump and China which continues to be dominated by threatening gestures

To arcane financial topics:

  • An unexpected run for liquidity in the ETF markets – where ETF offer liquidity for non-liquid assets - i.e. a repeat of the volatility scare in February but on a much broader scale

  • A meltdown in corporate credits and the corporate bond markets – where credit quality has dropped over the past decade and where the return on investment grade bonds this year has been a disappointing -3.5%

  • Rising interest rates which naturally boosts the USD and ‘threatens’ trade flows

We believe investors will turn their focus back to economic fundamentals, which are supportive. The expansion has been a long one but has room to run further. The Conference Board index of US leading economic indicators last year surpassed the previous cycle peak recorded in 2006 and has continued to make further gains each month this year. US consumer confidence is running at levels last seen in 2000. Solid economic expansion is underpinning the best quarter for corporate earnings growth since 2010. After 154 S&P 500 companies had reported first-quarter results, 81% had beaten earnings estimates by an average of 7%. Blended earnings growth is running at 22% year-on-year.

Political tensions are likely to continue to generate near-term volatility in equity markets. We believe that picking solid companies will prove to be the best long-term strategy to beat the market uncertainty. For those investors wanting to take advantage of the volatility of their positions can generate additional income through derivatives such as writing puts and calls.

Ultimately, we expect solid economic growth and robust earnings trends to push stock prices higher. We remain overweight global equities, but we will face higher volatility: it is Spring after all and as financial markets come with volatility, Spring comes with hay fever.

Switzerland, May 5th, 2018

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