MacroscopeGlobal equities’ sudden surge follows a steep December drop-off, and both are overreactions
- Don’t count on 2019’s across-the-board rally in equities to last – the rebound has been driven by temporary optimism over trade talks and a less hawkish Fed
Last December, the benchmark S&P 500 equity index suffered its worst final four weeks of the year since 1931 as investors fretted about a too-hawkish Federal Reserve, a sharp slowdown in Europe and China and the lack of meaningful progress in trade negotiations between Washington and Beijing.
Fast forward two months, and the S&P 500 is enjoying its best start to the year since 1987, up 11.3 per cent since the beginning of January. It is not just American stocks that have rebounded spectacularly. The MSCI All-Country World Index ex US – a gauge of global equities that excludes American shares – has risen almost 10 per cent this year, having lost 11.5 per cent in the final quarter of last year.
The rally, moreover, has been indiscriminate. All major asset classes, including commodities, high-yield corporate bonds and local currency emerging market debt, have delivered positive returns in the last two months after a year in which nearly every leading asset class suffered heavy losses.
Yet the speed and scale of the rebound – having come perilously close to entering a bear market (a fall of at least 20 per cent from a recent high) last Christmas Eve, the S&P 500 had already risen 13.5 per cent by mid-January – should be treated with caution. Whenever the pendulum of investor sentiment swings too far in the opposite direction in such a short period, alarm bells ought to be ringing.