Following several weeks of wobbly economic data, rising geopolitical worries, and intensifying doubts regarding the ultimate fate of pro-growth fiscal agenda set forth by new President Trump, US equities managed to reverse their recent bleeding last week. The S&P500 mustered a gain of +0.8% despite a back-and-forth wobble experience day to day. But more encouraging was that small-size companies and even broader indices such as the Wilshire 5000 fared better perhaps suggesting a return to improved sentiment might be nearing following weeks of deterioration and rising pessimism. At odds however with the more cyclical equities rebound last week has been fresh buying of US treasury securities, often regarded as the safety or risk-off trade when markets are jittery.
From an economic perspective, good news outweighed bad. Corporate sentiment and activity surveys show demand continues at a healthy clip; bank lending is rising and indicates confidence and steady demand; wages look to be accelerating; and gridlock on a significant piece of regulatory reform appears to be thawing (healthcare reform) here in the US is breathing fresh hope into the overall projected success of even bigger policy desires such as comprehensive tax reform later this year. And on a more granular level, anecdotal evidence from a broad swath of US cities both big and small can be viewed as borderline booming. Across the pond, economic data out of the Eurozone including leading indicators, consumer confidence, and auto sales were all quite favorable as well and support the thesis that the continent is finally participating in earnest in the economic expansion after years of muddling. Nominal GDP in China also accelerated to +11.8% over last year; a quite-strong reading no matter how one wants to look at it considering that the country is the 2nd largest contributor to global economic growth.
With economic data remaining supportive, the stalling of US financial markets since the beginning of March and April may be best explained as a needed and overdue breather. Financial markets rarely trend in one direction without pause, nor do they usually move so linearly. There have been more than enough concerns to explain the recent weakness as well. At the same time, recent demand for safe-haven trades like US Treasury securities last week, that normally signify risk aversion and caution may best be chalked up to heightened anxiety over the fate of the Euro amid the French elections over the weekend in which it has been feared another populist anti-establishment (and in this case anti-EU/anti-Euro) candidate was running close in the polls. To the relief of many, it appears that populism may be ebbing, which is being credited with global financial markets moving sharply higher as we write today. All this aside, recent weakness has been relatively tame, and while investor sentiment has deteriorated quite a bit perhaps signaling a return to more favorable trends might be near, we are also mindful of the calendar which historically is less accommodative. Bottom line though: we are not advocates of market timing (as the sharp reversal late-week last week and today perhaps may illustrate), especially when the longer-term trend is believed to remain firmly in place and supported by sound economic data. We still believe the economic cycle gives the up-trend the benefit of doubt.