So far, we’ve had a strong start to 2019, with the MSCI World up 11% from its lows and +6.3% year-to-date. According to Andrew Lapthorne over at SocGen a
“remarkable 87% of all MSCI World stocks are up to year-to-date; if that remains the same by the end of the month, it would rank as one of one of the best months ever for positive stock performance.”
Crucially this rebound has taken the shape of a “dash for trash” i.e value stocks have outperformed. “Not only have equities bounced back strongly but it is the ‘weak’ that are leading the way. Small caps are outperforming large caps, high volatility stocks are beating low volatility stocks and Value is outpacing Quality. “
My own sense is that this rebound is consistent with the archetypal late market rally – which could go on for some time yet. But eventually, the hard numbers of economics come into play.
I’d identify two key numbers worth watching. European dividend growth and PMI indicators.
On the first, I think that the macro numbers remind us that Europe is struggling a bit and the bumper growth we’ve seen in corporate cashflows might begin to slow down from here on in. Another SocGen report out today, for instance, suggests that when it comes to the big Eurozone listed stocks there’ll be flat dividend growth in the December 18 to December 21 period – all crystallized through the use of dividend futures, where numbers have been declining for the last few months. Their bottom line? They expect no earnings growth this year, with dividend payments also steadying after a lag.
And PMI numbers? Pretty much across the developed world, these have been signaling a steady deceleration in growth. What happens next? Cue a note out today from the research team at Morgan Stanley which looks at those PMI numbers globally. They observe that Global PMI peaked in December 2017, while the US ISM PMI saw the largest one-month fall since 2008.
So, should we as investors be concerned? Not yet says the Morgan Stanley team. “The current scenario of medium (neither too hot nor too cold) and falling PMI has historically meant mediocre but still positive returns for DM equities, underperformance in EM equities and credit, strengthening USD and falling US yields.”
What we really need to be watching out for is big cross over transitions, where PMI measures move sharply in one direction or another. “Markets are the most vulnerable when PMIs are very high (>55) and have risen sharply (an unsustainable rise pointing to future reversal). By the time PMIs have fallen below 55, where ISM PMI currently stands, market expectations tend to have already moderated, as seen from the December equity sell-off.”
Their message? Watch out for the February PMI numbers which will be “crucial”.
“Our US economics team expects a further fall in manufacturing PMI to 51.7. This print, which is still within the 50-55 range, would put us in a Goldilocks scenario for equities, while credit underperforms and bond yields fall. We don’t think that markets are priced for another huge downside surprise in PMI, with risks skewed unfavorably to the downside. Another sharp fall in PMI (below 50) would signal a new transition and challenge the recent risk rally”.