Chart of the week – Will the going stay this good?

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With equity markets now apparently having priced out further interest-rate rises by the US Federal Reserve or even the beginning of monetary tightening by the ECB and having already discounted a slowdown in economic growth generally, investors could well assume that there is little room for equities to appreciate further, prolonging the bounce that followed the sell-off late last year.

  • Recovery comes after one of the largest sell-offs
  • S&P 500 index forward price/earnings ratio now 16.3x, near historical average
  • China P/Es at just 11x, showing potential for appreciation and an opportunity

In addition to the factors mentioned above, hopes that progress in the Sino-US negotiations could lead to a trade deal have provided markets with a crucial leg-up.

Our chart of the week shows that the market recovery over the last month or so was actually the third-best over the last 45 years.

Significant S&P 500 sell-offs and rebounds

(year in legend is for market low)

Chart of the week – Will the going in markets stay this good?

Data as at 22 February 2019; index rebased to 100 at respective market low; source: Bloomberg, BNP Paribas Asset Management

However, past performance is no indicator of future performance. Should a trade deal materialise, it might well emerge that prices already fully reflect the gains from the accord, causing markets to pause or even setting off a “sell the fact” correction.

Another note of caution comes in the form of a lack of fresh triggers for further gains. Economic growth is not accelerating and neither is earnings growth. Indeed, an earnings recession – Q1 2019 company profits shrinking relative to the first quarter of 2018 – looks likely, although forecasts now also point to a recovery by the time of Q4 2019 earnings. That recovery, again based on current expectations, will however bring growth rates back to levels lower than in Q4 2018.

Returning to the historical perspective, even after the gains shown in the chart above, markets continued to rise anywhere from 15% to 30% in the following year. This time, we would still expect to see gains, albeit not of the same magnitude.


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Daniel Morris

Senior investment strategist, CFA charterholder

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