Virus cases rise, and so do stock markets: is this sustainable?
The big picture trend of global recovery led by developed markets with emerging markets lagging and persistent inflation pressures remain, but there are important nuances evident in recent data.
The US economy: welcome to the working week
Starting with the US, after strong numbers for employment and services that I mentioned last week, we’ve had some weaker readings. The University of Michigan survey showed a decline in consumer sentiment, linked to the rise in new virus cases. This also explained a dip in some of the high frequency reopening data: airline traffic edged lower along with hotel and restaurant bookings.
On the plus side, the infrastructure bill made further progress attracting significant Republican support. This is not to be confused with the much bigger bill dubbed ‘human infrastructure’ – an ambitious attempt to introduce something akin to a European-style welfare state in the US.
Vaccination rates key to economic recovery
Recovery is never smooth, and we see the weaker data as a bump in the road. The US, like the rest of the developed world, is learning to live with the virus and high vaccination rates make it all sustainable. Vaccination rates in the US are picking up again, and in some areas, notably New York City, authorities are making jabs a requirement to get into venues like restaurants and gyms.
More generally, equities typically do well in the run up to the first Fed rate hike, and for some time thereafter. If this pattern were to be repeated, the equity bull market could last through to the other side of summer and well in to 2022, perhaps even beyond.
Meanwhile, back in the UK, our new cases are edging higher and there are several reasons why they will rise further. The football season has restarted, school holidays end soon, and the end of the ‘pingdemic’ means many fewer people will now have to self-isolate following contact with an infected person. Risks are still high, but we reckon the economy will continue to recover strongly, with high vaccination rates protecting the vulnerable. We should get data showing that employment and spending are picking up. The Bank of England have already said that they are moving cautiously towards a slightly tighter monetary policy, just like the US.
Corporates appear to have protected recent profit margins
After another bumper earnings season, there are signs that companies have been able to protect their margins, despite the disruption associated with Covid and the difficulties in recruiting workers. All this means that we remain confident in our central view that risks assets are set to outperform cash and bonds, and we prefer developed market assets over emerging markets.
We’ll be taking a break this month from our Macro Update webinar, but these weekly updates will continue.
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.