Whilst the economic calendar this week has been fairly quiet, the party across various markets continued in full swing.
US bond yields (at least at the short end) were breaking to multi-year highs. Apart from general excitement about synchronised global growth, bonds were affected by a newsflow from China. Some sources reported that Chinese authorities were considering slowing or halting purchases of US Treasuries due to trade tensions with Washington. China denied the reports as being “fake news”, but some commentators suggested that the possible leak could have been intentional to counter President Trump’s protectionist measures.
The sell-off in bonds means that US Treasury yields are now seriously competing with the dividend yield on the S&P 500 Index, something not evidenced in a long time. The S&P trailing dividend yield now stands at 1.8%, which is easily beaten by any US Treasury bond with maturity longer than six months.
The S&P 500 reached a record high on Monday and then again on Tuesday (on top of making new highs every day of the prior week). This was the first time since 1964 when the Index posted six consecutive record closings. The Market took a brief breather midweek and then resumed this fascinating ascent. Based on the value of futures contracts at the moment of writing, Friday is set for yet another fresh record. Despite being almost nine years old, this bull market showed it still has legs and could become the greatest bull market of all time.
What could put a break on the current rally? The list of risks is still fairly substantial. It starts with bond yields rising too far, too fast, causing a correction in equity market valuations, inflation getting out of control, China slowing down considerably – and then there are Italian elections in March, the US midterm elections in November, Brexit, and a whole range of geopolitical issues.
But the risk map is not all red. Some positive surprises could also materialise this year. US tax reform could be followed by other fiscal stimulus (i.e. infrastructure boost), leading to economic growth materially exceeding current expectations. Productivity, which has been under pressure for some time, could finally revive, or a pickup in activity could lead to a global trade boom.
Although markets cannot go up in a straight line forever and there ought to be some increase in volatility along the way, there are still plenty of things to be excited about in the near future and this good thing might not come to an end just yet.