Equity markets rebounded strongly in January. Investors reacted enthusiastically to some of the nuances around the Federal Reserve’s decision to leave interest rates unchanged. Indeed, some of the language used to communicate the decision suggested that the next move in rates could even be down rather than up. There were also tentative signs of progress in talks between the US and China over a trade deal. Brexit negotiations continued to rumble on but the prospect of a ‘no deal’ outcome appears to be slightly diminished.
The decision by the Fed to slow the pace of rate rises was the catalyst for stocks to rebound from the heavily oversold position of early December. However, for stocks to make further progress in the short-term there will need to be some stabilisation in the economic data. Over the last few days the ECB, Bank of England (BoE), and Reserve Bank of Australia (RBA) have all downgraded their growth expectations for the forthcoming year. A coherent argument can be made that all three have perhaps been overly pessimistic, with the BoE looking particularly aggressive, even when allowing for persistent Brexit uncertainty. Nonetheless, the direction of travel for global growth is clear. Without signs of improvement then equities will likely remain range-bound. Longer-term we continue to believe that the global economy is ‘growing but slowing’ and as a consequence the negative divergence between cyclical and defensive stocks is too large. Many cyclical businesses are pricing a significant decline in earnings that we don’t think will materialise.