Equity markets remained resilient on Tuesday as overnight we received the Chinese industrial production data and retail sales, both came in pretty much in line with expectations. In Europe, Germany's ZEW economic sentiment survey came in below expectations. The Wall Street Journal published an article headlined “Bundesbank Willing to Back ECB Stimulus Measures to Battle Low Inflation”. The article states the Bundesbank is willing to back an array of stimulus measures, including negative rates on bank deposits, to combat as they see it unacceptably low inflation. This article led to another fall in the euro and boosted the S&P 500 to the record level of 1900.
Equities in May have continued to grind higher, those who sold possibly expecting a correction are so far being proved wrong. The latest Merrill Lynch fund manager survey reveals that investors are holding higher levels of cash than normal, and have now taken their holdings of cash to the highest level in nearly 2 years. This equity bull market rally will be (according to Merrill Lynch) the third longest in history in less than 12 months time, and continues to feel the most unloved.
The last 30 years has been almost unparalleled in history for asset prices, during the post inflationary period of the 1970s as central banks have focussed on controlling inflation, leading to a period of lower short and longer term interest rates. This has meant that both stocks and bonds combined have produced real compound annualised returns approaching 8% during this period, according to BCA. Whilst the last 30 years have produced good returns for both bond and equity investors, it has also produced in the last 15 years, 2 of the biggest bear markets of the last 100 years.
The sceptics continue to believe that the rise in equity markets over the past 5 years has been no more than a result of the flood liquidity provided by central banks. Once this period of cheap liquidity comes to an end so will the rally in asset prices. To some degree this is true, the liquidity by central banks has stimulated asset prices, both in property as well as equity. The supporters of the banks policies believe that as the liquidity is slowly withdrawn economic growth will continue to recover along with corporate earnings. Economic growth has started to show signs of picking up and history tends to show you that once it does start to find momentum, and confidence returns, it does tend to feed on itself.