European stocks have been stuck in a trading range for almost 20 years. Is a breakout finally at hand? The Stoxx Europe 600 index hit 22-month highs last week and is hovering just below the 400 level that marked a generational top in 2000. That’s since been a major technical resistance level, exhausting the patience of European investors by rebuffing market advances in 2007, 2015 and early 2018.
Indices in Germany, France, Italy, and Spain are all on the verge of major breakouts, notes Jonathan Krinsky of Baycrest Partners, and the bullish action is not confined to Europe: breakouts in emerging markets have helped lift all-world indices to break out from a two-year base.
“It’s difficult to be too bearish in that scenario,” says Krinsky, “and there is likely more room to run for global equities.” European investors will certainly hope so. Breaking out of a two-decade base would suggest Europe’s secular bear market is finally over, kindling optimism that much better returns lie ahead in coming years.
A global bull market may be under way
The improving global outlook is also exciting Topdown Charts’ Callum Thomas, who says global stocks are giving off “some rare signals” usually only seen at the start of bull markets. Firstly, 15 national indices – the highest number in almost two years – are trading at 52-week highs. A dearth of new highs followed by a “sudden upswing” is a “classic bull market commencement signal”, says Thomas, one seen at the start of the last three cyclical bull markets.
Additionally, 27 per cent of countries are now in bull markets, says Thomas, up from just 4 per cent late last year. A collapse in this indicator, followed by a strong turn up (like now), typically signals a major market bottom and a subsequent global bull market.
The same improving pattern is evident when one looks at the number of indices that are positive on a year-on-year basis. Thomas sees other reasons for optimism – global stocks are “slightly cheap”; global monetary policy is accommodative; fund manager positioning coupled with the reset in earnings expectations mean sentiment is muted and “arguably contrarian bullish”.
Overall, market movements suggest “a new bull market is under way in global equities”.
More rate cuts might not be good for Trump
Last week, the Federal Reserve cut rates for the third time this year whilst signalling it might be time to pause its rate-cut cycle. That prompted the usual Fed-bashing from Donald Trump, who tweeted that people are "VERY disappointed" in the Fed.
In fact, three quarter-point cuts in a row have historically augured well for stock returns, notes LPL Research strategist Ryan Detrick – similar instances in 1975, 1996 and 1998 were followed by average six- and 12-month gains of 10.1 and 20 per cent, respectively.
Trump may not be happy by the pace of rate cuts, but a more aggressive approach is associated with recessionary environments. In 2001 and 2007, for example, the Fed began its rate-cutting cycles with half-point cuts, but stocks tanked anyway as the economic outlook continued to darken.
In contrast, the Fed has likened its current approach to taking out insurance. Last week, the Fed indicated further cuts would come “if developments emerge that are a cause for a material reassessment of our outlook”. In other words, the Fed wouldn’t be cutting rates for insurance purposes; they would be cutting to try and avert a growing recession threat.
Rate cuts aren’t always a good thing – Trump should be careful what he wishes for.
Waiting for sterling uncertainty to lift
Sterling has rallied hard as the prospect of a no-deal Brexit has receded, but "significant positioning" in either direction now "looks unwise", JP Morgan cautioned last week. That uncontroversial advice is echoed by other analysts.
Goldman Sachs, which had a $1.35 target against the dollar (after going as low as $1.22 in early October, sterling recently touched $1.30), has suggested a "tactical retreat" due to uncertainty surrounding the upcoming general election, whilst Deutsche Bank says there is "little risk-reward in having directional views on the pound until there is more certainty about the outcome of the election". Traders can be forgiven for taking profits. Sterling recently enjoyed its biggest seven-day rally against the dollar since 1985.
Additionally, whilst the Conservatives look set to be re-elected, the collapse in support for Theresa May's government prior to the 2017 election is a reminder that it's no done deal. A hung parliament, a minority Labour government under Jeremy Corbyn, a Conservative coalition with Nigel Farage's Brexit Party – the variety of possible outcomes means investor caution is understandable.
Still, Deutsche Bank’s advice about waiting “until there is more certainty” misses the point. One often hears such advice in times of uncertainty, with commentators suggesting investors wait until the coast is clear, but markets are pretty efficient. Developments gets priced in quickly; the risk-reward setup may look just as unappealing by the time the uncertainty has lifted.
