The reasons to bet against the rally across risk assets are numerous, serious, and almost exactly what they were before this year’s blistering melt-up.
And yet this raging bull won’t go gently. It’s braved death and doubts -- and beaten both. Six months into 2019, the S&P 500 has returned 17%, marking the best first half in more than two decades. Europe’s benchmark has matched the feat. U.S. investment grade corporate bonds are having their strongest year ever.
Forget the longevity for a second and marvel at the sheer defiance. On Christmas Eve, the S&P 500 was seven points from a bear market, and a stream of Wall Street prognosticators shuffled forth to pronounce the last rites. Since then, the gauge hit a record twice.
“Investors had very low conviction at the start of this year, but those who were brave enough to once again get into risk assets reaped rewards,” said Wouter Sturkenboom, chief investment strategist for EMEA & APAC at Northern Trust Asset Management. “It’s a good lesson for investors not to stay scared for too long.”
Death isn’t the only thing this bull market defied. Net outflows for 2019 from U.S. equity funds totaled $41 billion through Wednesday, according to Bank of America, which cites EPFR Global data. Globally it was $138.5 billion. European stocks bled $71 billion.
The cash exodus is understandable given the macro backdrop, another headwind seemingly ignored by equity prices. Citigroup Inc.’s global economic surprise index has been negative since April 2018. Disappointing U.S. numbers have been a big part of that, with hard and soft data trending down together.
Throw in an unpredictable trade dispute, and it makes for a cloudy outlook.
“On the economic side, you don’t have any proof or any sign the situation has improved significantly,” said Francois Savary, chief investment officer at Prime Partners SA in Geneva. “It means that the valuation of equities is back to a level that justifies being a little more cautious.”
For some, the resilience of stocks could be a signal the business cycle isn’t as sickly as it seems. For others, the divergence from fundamentals can be ascribed directly to the apparent willingness of central banks to defend growth.
As Goldman Sachs Group Inc. strategists observed this week, markets “have shifted back to a ‘bad news is good news’ regime.” The bet is that policy makers will move to shore up the economy and either succeed or in the process add stimulus that spurs asset prices.