The bullish market regime is reemerging from the turmoil in May and June unscathed in most major economies. Just days after the start of the earnings season, US stocks have rallied past all-time highs. In China, money market…
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Mikio Kumada, Global Strategist at LGT Capital Management
rates have fallen back to normal, which has stabilized the country’s stock markets. In Japan, the Upper House election on Sunday is set to reaffirm the mandate for “Abenomics”. Japanese equities are likely to reclaim the May highs thereafter as well.
US stocks reclaim the May record highs
If you were focusing purely on stock market developments, you would probably not know that there has been considerable excitement surrounding the scenarios of the eventual unwinding of the Federal Reserve’s “quantitative easing” program. You would have seen only another very common and comparatively modest bull market correction/consolidation, just like the ones we have seen at least once every year since March 2009, when the current bull market regime was born.
Underlying technical structure of the US stock market has continued to improve
Furthermore, you would have also noticed that, beneath the surface, the market as a whole was actually adopting a more economically optimistic – more bullish – structure during this turmoil. Firstly, so-called cyclical stocks have rallied since 22 May, when the major indices started to fall. Since then, sectors that are most sensitive to future economic growth have generally outperformed the defensive ones. Among the five best-performing sectors since 22 May, we find four are cyclical, compared to just two in the preceding three months. These internal market shifts imply that economic confidence has increased. Incidentally, they are also compatible with rising long-term interest rate expectations. Secondly, market breadth has remained strong, with a majority of shares participating in market rallies on positive days. When a bullish trend is about to end, we typically see a “divergence” in this area – i.e. market breath starts declining even as the benchmark stock index recovers and rallies. There was no such “early warning” that the bull regime was at risk in recent weeks, however. If anything, the market signals suggest accelerating gains in the near future.
Bullish regimes intact in Europe and Japan, although intensity of momentum varies
A bullish regime/market structure has also remained intact in Japan and the Western European markets, although the latter appear to enjoy a more moderate upward momentum. By contrast, in the emerging markets and many markets in Asia-Pacific, the structure has become more defensive during the consolidation of the past couple of months – which shouldn’t appear surprising by now, given that these markets have been underperforming for some time now. While very long-term absolute trends in the emerging markets and Asia remain quite intact, the short-to medium-term market signals now clearly indicate a better upward momentum for the traditional Group of Seven regions. The G7 have come a bit out of fashion over the past decade, both politically as well as thematically, as an economic story. But the G7 region economies (North America, Western Europe, and Japan) still represent around 69% of the world’s market capitalization, which makes any rally in these markets global.
Upcoming vote on “Abenomics” is an important signal
Lastly, a few words on Japan: the House of Councilors election this Sunday is expected to produce a strong majority for Prime Minister Shinzo Abe’s ruling coalition, which would give it control of both houses of parliament (the coalition had won control of the House of Representatives in December). That leaves many investors wondering about how big the market upside is at present, given that the result is probably already priced in. Skepticism about Japan’s willingness and ability to reform still seems to be very high among investors, and – given that Japan has repeatedly failed to break out of its economic stagnation over the past 20 years – who can blame them? At the same time, however, “Abenomics” represents a comprehensive economic program that includes extraordinary elements, making this a highly unusual case. The economic momentum and social dynamics that can arise from quite radical policy shifts should not be underestimated either, especially when they enjoy strong popular support.
Source: ETFWorld – LGT Capital Management
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