18 September 2019
There was a violent reversal in some of the markets’ most crowded trades, with large cap momentum stocks strongly underperforming small cap value stocks. Not only in the stock market but also elsewhere, crowded trades with recent strong momentum, like long-term government bonds and gold, fell back as investors turned to more cyclical themes, including sectors like banks, oil services and retail, which seemed to be rising from the dead.
The sudden preference for cyclical themes suggests that markets are responding to tentative signs that the global economy is bottoming out after almost two years of slowing. Markets have a tendency to anticipate turns in the economy and may also be right this time to expect improvement. Central banks worldwide certainly have done their best to revive animal spirits, with the percentage of global central banks in easing cycles having risen to over 80%, having doubled since the start of this year. Among the more important ones, the ECB further eased policies last week while the US Fed is expected to announce a second rate cut this week. There are early signs that this global accommodation is starting to work, but it will likely take several months of improvement for investors to feel confident that the global slowdown has really ended. Investors will need to be convinced that the slowdown is ending before last week’s bounce in cyclicals can transition into a sustainable rally. In the short term, confidence will continue to be undermined by the ongoing US-China trade conflict and the approaching Brexit date (end of October). While improving trends in stock markets globally are encouraging, there is not enough evidence yet that the recent cyclical bounce is sustainable. However, further improvement in macro indicators could increase the potential for a strong year-end rally in global equity markets, quite the opposite of what happened last year.