The outlook for global shares continues to hang on the same handful of factors as previously: the performance of the U.S. economy, the wider performance of the global economy, the potential impact of trade wars, the tension between expensive share valuations and rising bond yields, and the lurking risks of geopolitical issues.
In the U.S., corporate profits have been rising remarkably strongly.
On data company FactSet’s calculations, profits for the S&P500 companies in the June quarter were 25% up on a year earlier, and on FactSet’s compilation of brokers’ forecasts U.S. companies are expected to record 20.6% growth in profit for 2018 as a whole. Analysts expect further good news for 2019, with profits expected to grow by a further 10.3%.
While the numbers have benefited from some one-offs; rising energy prices, U.S. tax cuts, that will wane over time, this is nonetheless an impressive performance. The latest economic news has also continued to be reassuring.
Jobs, Jobs, Jobs
The key statistic is jobs: There were 205,000 more jobs in August, much as economists as expected, and the unemployment rate stayed at a low 3.9%. As noted earlier, wages started to grow rather more strongly during the month, at a 2.9% annual rate, the fastest rise in almost 10 years. Remarkably, there are now more job vacancies in the US, 6.94 million, than there are officially unemployed people, 6.28 million, a situation that first emerged in March and has become more pronounced since then. The rest of the world is nowhere near as buoyant but is also growing.
The latest consensus forecasts from the Economist magazine’s panel of international forecasters show that the eurozone is picked to grow by 1.8% next year, the U.K. by 1.4%, and Japan by 1.2%. These are self-evidently not tremendous growth rates, and they are vulnerable to even quite modest adverse shocks. But all going well, the major developed economies will continue to contribute to the ongoing post-global financial crisis business expansion.
Emerging Markets Continue to Grow
Although the financial and other problems facing some emerging markets have dominated the news, it is also worth noting that all the key BRIC – Brazil, Russia, India and China – economies will be growing next year. In the case of the two biggest, growth is likely to be very strong, with India expected by the Economist panel to grow by a very substantial 7.3% and China not far behind with a strong 6.3%. Both Brazil and Russia have had their issues, but they, too, are expected to grow next year.
The central scenario remains one of ongoing global growth. But it could be disrupted. The key issue, as revealed by recent surveys of large fund managers, is the threat of protectionism, largely driven by the U.S. against its trading partners, but there are also other potential trade-disrupting developments, notably Brexit. They may yet turn out to manageable.
At time of writing, the U.S. appeared to be putting out feelers to China to try to prevent escalation of their tit-for-tat rounds of tariff increases, although there is less room for optimism around the omnishambles of the U.K.’s Brexit negotiations. Even if trade issues eventually become less alarming, however, it is worth bearing in mind that protectionist outcomes range from bad to less bad: All of them put barriers in the way of global trading growth.
Could the Fed Derail Markets?
There is also the slumbering issue of potential monetary policy mistakes. Faster-than-optimal normalisation of monetary policy could adversely affect economic growth and would also upset the relative valuations of equities and bonds at a time when equities, especially in the U.S., are expensive.
The historic P/E ratio on the S&P 500 is 24.2 times earnings, and the prospective ratio is 17.8 times. The equivalent ratios for the tech-oriented Nasdaq index are even higher, at 25.75 and 21.4. Valuations leave little room for earnings disappointment, valuation reassessment, or adverse shocks out of the blue.
Investors Too Complacent?
There is also the risk that investors have once again become too relaxed about the true level of potential risk, especially when the tenor of much “tenth anniversary of the global financial crisis” commentary has been that finance still has the potential to spring further unpleasant surprises.
The VIX index of the volatility investors expect to encounter from holding the S&P500 has once again dropped back to low levels, consistent with investors seeing no especially worrying risks on the horizon. This does not ring especially true, considering the range of financial, economic, and geopolitical risks that might yet trip up the global economy.
While risks abound, the post-global financial crisis world economy and global equity markets have found a way to muddle through, and some further modest gains remain the most likely scenario.
