Weekly review: is all the good news priced in?

Macro Update 12 April 2021
April 2021
Steven Bell

Steven Bell

Managing Director, Portfolio Manager & Chief Economist, Multi Asset Solutions


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Risk Disclaimer

Past performance is not a guide to future performance. The value of investments and any income derived from them can go down as well as up and investors may not get back the original amount invested.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.
Key takeaways
Is all the good news priced in?

The UK and US are easing lockdowns as their vaccine roll-out programmes cover the most vulnerable. Europe’s programme has been much slower but is set to catch up. The developed world has found the answer to the virus, and economic recovery is expected to follow rapidly. Meanwhile, central banks have promised to keep official rates on the floor and finance ministries are pumping out stimulus, led by the US. So, what’s not to like for risk assets?

A positive background, but where will the next step higher come from?

Yes, this is a positive background but my problem is that I’m searching for where we get good news that surprises the markets and leads to another step higher. The Q1 reporting season for companies is about to get underway and although I expect companies to beat estimates for earnings and revenues, I think most investors are expecting that too. We’ve had three successive quarters where earnings have beaten estimates by a big margin and this has made investors complacent. It’s important too that companies are positive in their statements about the future. Investors expect further recovery, and they will need to be assured that it’ll be vigorous.

They also need to be reassured about inflation. The US Federal Reserve has made it clear that they expect – and indeed welcome – a pick-up in inflation. They want to run the economy ‘hot’ for a while. They have also made it clear that they see the pick-up as temporary.

US infrastructure spend to increase, as well as taxes

Meanwhile, the White House is pushing a huge infrastructure programme, more than $2 trillion dollars over several years. But this is to be coupled with corporate tax rises. Many commentators expect that the rise in the headline rate of corporation tax to 28% in the Draft Bill, will be moderated, to say 25%, as it passes through Congress. But there are other elements to the package that will see the corporate tax burden rise. We are not sure that analysts have fully factored all that into their earnings forecasts.

Perfection could lead to correction

When the markets are priced for perfection there is often a significant correction before the rally restarts. Will we get this here? I’m not sure – there are still big supports in terms of retail buying and super-easy financial conditions. After all the turbulence of the last 12 months, the biggest danger is that a new variant emerges that resists the wide array of vaccines that are now available. That would likely only delay recovery while the scientists tweak the vaccines, but it could still pose a threat.

Virus variants still a concern, but we remain bullish

Some emerging market countries, notably Brazil, are really struggling with new variants. Resisting variants is a major concern for all countries, but especially those with an advanced vaccination programme like the UK and US. So, we expect travel restrictions to remain in place for a good while yet, even as other restrictions are eased.

We’ve been bullish on the markets for most of the last year and I’m not calling a halt yet. But progress here is set to be much more difficult. We need some new force to push markets higher. It could be slow going in the next few weeks.

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