For at least two weeks now, traders and investors could be forgiven for feeling like they have been trying to drink from a fire hose, and a multi-flavor one at that. Virtually every day, they have been confronted by some combination of market-moving corporate earnings and economic news, supplemented by competing policy signals and volatile technical influences.
As confusing as this situation may seem, it speaks to a fundamental transition in markets that I have described before. It has two major characteristics: increasing divergence in economic and corporate performance, as well as policy; and increasing dispersion in asset valuations. Both are underpinned by macro themes that are playing out in real time.
This is best seen, and best monitored going forward, through a grouping of recent developments and market influences. They fit into three broad categories that speak to country and corporate fundamentals, policies, and technical influences on markets.
Economic and Corporate Fundamentals
Recent data releases confirm that the U.S. economy is increasingly outpacing other advanced countries despite its duration. Currently, it’s on track for the longest expansion on record.
U.S. GDP grew at 4.1 percent in the second quarter of the year as the Eurozone slowed to its weakest rate for two years. And while part of the surge in U.S. growth was due to one-off factors, the underlying health of the economy was confirmed by last Friday’s employment data. The three-month employment creation rate of just over 220,000 jobs a month is impressive, and is likely to result in strong economic performance as wage growth (at 2.7 percent) and, hopefully, labor force participation (62.9 percent) pick up. There is a real possibility that America’s economic outperformance may be reflected in an increase in both actual and potential growth.
The increasing divergence in advanced country economic performance has been accompanied by a similar phenomenon in emerging markets. Domestic economic and policy factors separating countries there have been compounded by the impact of actual and feared sanctions, particularly for China and Turkey. In China’s case, it has already led policymakers to step up the implementation of monetary and fiscal stimulus in the past two weeks.
In the corporate world, the markets’ attention has extended well beyond the traditional headline numbers relating to profits and revenues, including in the tech sector. As a result, many investors have had to confront the obvious reality that not all “FANNGs” are the same. With that, engagement and other forward-looking metrics have been given a lot of attention, driving a wedge between the stock performance of Amazon and Apple (whose market capitalization was the first to breach the $1 trillion milestone) and those of Twitter and Facebook (which suffered the largest one-day dollar loss in market capitalization in the history of stock markets).
Policy Signals
While divergent economic and corporate trends are not new, their increasing impact on asset prices is partly explained by what is happening on the policy side -- both for central banking and trade.
Over the last two weeks, markets have received further confirmation of the growing gap not only in the normalization of monetary policy, but also in the confidence that each of the systemically-important central banks have when it comes to maintaining orderly bond market behavior.
On one hand, the Federal Reserve confirmed its intention last week to continue to raise rates, reassured that “strong” domestic economic performance will enable the U.S. to shrug off weakness abroad and uncertainty about the international trading regime. In the process, policymakers set aside concerns about high-interest rate differentials versus other advanced countries, a flat yield curve, a stronger dollar, increased volatility in fixed income markets, and pressure from President Donald Trump’s tweets.