Throw away your year-end investment statement and take another look. Since January 1st, local and global sharemarkets have been on a 'tear', defying last year's doomsayers, and rebounding by about 11% (for now).
The drivers behind this sudden turnaround in sentiment are numerous, but primarily come down to three key areas...
Interest rates.
Since the beginning of 2019, the tone and posture of central bankers, particularly in the US, has shifted 180 degrees. Not wanting to inadvertently trigger a recession, the US Federal Reserve along with our own Reserve Bank of Australia, has replaced its earlier assertive language with more dovish, sensitive messaging. The assumption is that these soothing words effectively translates into more gradual interest rate hikes in the year or two ahead.
A US-China trade deal.
Increasing hostilities between the world's two largest economies is a serious issue with potentially far reaching ramifications if left unresolved, and this has been weighing on global confidence for some time. But as US-China trade negotiations commenced in January, you could sense that both parties, having already seen the early signs of an economic slowdown, were finally ready to do a deal. While there have been no formal announcements the optics have, at least so far, been encouraging, with President Trump suggesting a 30-60 day delay in further Chinese tariffs.
Of course, as with US interest rates, much of this optimism, and subsequent market rally, has been based on 'hope', so any disappointment or setback could conceivably send markets into a tailspin as they have arguably come too far, too fast.
The Banking Royal Commission (RC).
Locally, bank shares, which represent much of the Australian share market, received a sharp boost (about 5%-6%) the day after the RC report was announced. Just a cursory glance at the RC report's proposals and you can understand why bank shares enjoyed a 'relief rally'. No further comment.
Looking ahead, I suspect a short-term market pullback is likely, simply due to the intensity and speed of this year's market rally - Australian economic growth looks to be slowing, and while there is some expectation that the RBA will cut interest rates, that’s probably still a way off.
But as global policy swings to being more stimulatory and growth indicators improve, shares should perform well for the year as a whole.
Rick Maggi CFP