After one of the worst Decembers on the financial markets for more than 10 years, we had one of the best Januarys: +7.87% for the S&P 500, after -9.18% in December, and +15.04% for the barrel price of oil, after -8.36% in December, with similar performances for most risk assets.
The Fed’s change in tone played a major role in this turnaround in market sentiment, as was also the case in September and December. With a bit of hindsight, some thought the Fed had extinguished the fire it lit in September when it said it wanted to go "further than getting rates to neutral".
All the same, the extremely accommodative message from Jerome Powell and every Fed representative, particularly with regard to balance sheet reduction, played a large part in reassuring the markets. As such, the markets can now go about their business in the knowledge that interest rates will not rise before the end of June, at the earliest.
Another factor that probably contributed to the performance of the markets in January was their "overreaction" in the fourth quarter of 2018, and particularly at the year end, in markets that had become less liquid. Did the impact of systematic strategies amplify the market movements? Was it a capitulation on the part of institutional and private investors after a historically long bull market in US equities? Whatever the reason(s), the indicators that we follow show that all flows into non-risk assets ("core” government bonds, money market instruments) were at historically very high levels at the end of the year, which partly explains the rebound in January.
Moreover, other more fundamental factors have enabled this rebound to continue.
Corporate earnings releases, which are well on track in the United States, have been reassuring, at around 70% above analysts’ forecasts, which is close to the historical average. This figure should be seen in context given the substantial downgrades that had been made to forecasts, but is nonetheless reassuring overall, assuaging the fears of a collapse in earnings expressed in certain quarters.
Similarly, the latest US activity indicators have helped to reassure investors of the low probability of a recession in the short term.
Now that the markets seem to have corrected their excesses, what attitude should we take? As things stand, it still looks like a good time to be investing in emerging markets. The risk premia remain high, investors have been keeping their distance, and the risk of a spike in the dollar seems fairly low in light of the Fed’s recent statements. Elsewhere, we retain our positive view on Portugal and Spain, and on US inflation expectations.
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