Last year was a stellar one for equity market performance, with strong gains
The S&P 500 increased by 20%; the Dow Jones gained 24.3%; the Ftse-100 gained 7.6%; the German Dax jumped 12.5%; the French CAC-40 gained over 9%; the Japanese Nikkei gained 19%; and Dublin’s Iseq added almost 8%.
This was a very pleasant and rewarding environment for equity investors and one in which investors were basically prepared to ignore any bad news that was thrown at them, and there has been plenty of that.
In early March, we passed the ninth anniversary of the equity market bull run, which was the second longest in history and the second strongest. Alas nothing lasts for ever.
As we move into the early days of the second quarter of the year the mood music is very different.
Despite a very strong start to the year, things have subsequently soured and the first three months of the year turned out to be pretty nervous and challenging.
During the first quarter, the S&P lost 2%; the Dow Jones lost nearly 32%; the Ftse-100 lost almost 8%; the Dax lost 6%; the CAC-40 lost 2.3%; the Nikkei lost nearly 9%; and the Iseq shed 6.5%.
With just a few days trading since the end of the first quarter, these negative numbers are somewhat more pronounced.
In short, markets are now displaying lots of nervousness and volatility is a
concept that we are getting to know and love again after a marked absence over an
unusually prolonged period.
Perhaps the change in sentiment is no more than one might have expected after such a long period of very positive performance.
However, that does not provide the whole story. The reality is that a number of different factors have combined to generate a much higher level of uncertainty and nervousness.
First up is the fact that global economic momentum is very strong and the markets have concerns that central bankers may panic in the belief that inflationary pressures may eventually start to take off.
In other words, the markets have been unusually relaxed about inflation and interest rates for quite some time and are now becoming somewhat less relaxed.
A sharper than expected rise in interest rates would ultimately damage economic growth and corporate performance. That is of concern to the markets.
Secondly, the tit-for-tat trade spat between the US and China is gathering
While the sectors affected and the tariffs suggested at this stage are quite minimal, the rate at which the situation is escalating certainly does give cause for concern.
President Trump is intent on righting the wrongs which he believes China is exercising on the trade front, and China will obviously react to whatever he does next.
The problem, of course, is that the impact of an escalation of the trade spat would not be confined to the US and China and would certainly have implications for the wider global economy. Those implications would not be remotely positive.
The third issue is specific to the technology sector.
Following the very disturbing revelations of recent weeks, Facebook is under some considerable pressure.
The main risk is that advertising will suffer and the earnings momentum that has propelled the company’s share price skyward could come under threat.
While Facebook was struggling to cope with its difficulties, Mr Trump went and tweeted a pretty threatening tweet about Amazon, another darling of the markets.
Given the ownership of Amazon, Trump is obviously playing a political game, but it is a dangerous game in the context of the impact it already has had and potentially will have in the future.
The tech sector is now under the spotlight as rarely before.
All in all, it all adds up to a pretty murky background for markets that have come so far and which, on some metrics, are looking somewhat stretched on a valuation basis.
Investor caution looks the most appropriate stance for the moment.