Investment Clock insights

One of longest rallies in 25 years likely to continue


Trevor Greetham 

28 February 2017

RLAM’s investor sentiment indicator (chart 1) has moved further into euphoric territory as US equity markets made new all-time highs, ahead of President Trump’s much-awaited keynote speech to both houses of Congress. Many commentators are linking the strength of stocks to Trump’s victory in the November 2016 presidential election, but our analysis shows that the current recovery in stock prices dates back over a year to the market panics when China unexpectedly devalued its currency in 2015 and early 2016.
The last time our sentiment indicator moved into panic territory was 54 weeks ago. Looking back over the last 25 years (chart 2), there have only been three occasions when markets rose for longer without interruption.
1. The Rally after the Lehman Failure in 2009/10 (60 weeks)
2. The Rally after the invasion of Iraq in 2003/4 (56 weeks)
3. The Rally after the Mexican peso crisis in 1994/5 (57 weeks)
All of the rallies lasting about a year or more were linked to improvements in global growth after a loosening of monetary or fiscal policy in the major economies. The current rally reflects improvements in global growth and receding fears about deflation, triggered by a recovery in the Chinese economy and by easier monetary policy elsewhere in the world. While the start of the rally pre-dated Trump’s election, he has stoked expectations for looser US fiscal policy and Today’s speech will have to include a convincing high level outline of tax cuts and spending increases for the current euphoria to be sustained without interruption.
With inflation rising from very low levels and deflation worries fresh in people’s minds, we expect fiscal and monetary policy to stay loose despite the on-going improvement in global business confidence. We remain overweight stocks and, as long as the positive policy backdrop remains in place, we would probably see a sell-off linked to political risk in the US or Europe as a buying opportunity.

RLAM’s investor sentiment indicator (chart 1) has moved further into euphoric territory as US equity markets made new all-time highs, ahead of President Trump’s much-awaited keynote speech to both houses of Congress. Many commentators are linking the strength of stocks to Trump’s victory in the November 2016 presidential election, but our analysis shows that the current recovery in stock prices dates back over a year to the market panics when China unexpectedly devalued its currency in 2015 and early 2016.

The last time our sentiment indicator moved into panic territory was 54 weeks ago. Looking back over the last 25 years (chart 2), there have only been three occasions when markets rose for longer without interruption.

1. The Rally after the Lehman Failure in 2009/10 (60 weeks)

2. The Rally after the invasion of Iraq in 2003/4 (56 weeks)

3. The Rally after the Mexican peso crisis in 1994/5 (57 weeks)

All of the rallies lasting about a year or more were linked to improvements in global growth after a loosening of monetary or fiscal policy in the major economies. The current rally reflects improvements in global growth and receding fears about deflation, triggered by a recovery in the Chinese economy and by easier monetary policy elsewhere in the world. While the start of the rally pre-dated Trump’s election, he has stoked expectations for looser US fiscal policy and Today’s speech will have to include a convincing high level outline of tax cuts and spending increases for the current euphoria to be sustained without interruption.

With inflation rising from very low levels and deflation worries fresh in people’s minds, we expect fiscal and monetary policy to stay loose despite the on-going improvement in global business confidence. We remain overweight stocks and, as long as the positive policy backdrop remains in place, we would probably see a sell-off linked to political risk in the US or Europe as a buying opportunity.

Chart 1:  RLAM investor sentiment indicator and global equity prices

 

Chart 2: Number of weeks since the last market panic*

*defined as the number of weeks since the last panic reading from the RLAM investor sentiment indicator. Source: RLAM as at February 2017. 

The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.