— Apr 26, 2019


Economic growth around the world has faltered, with a significant slowdown from the synchronised growth we saw during 2017 and early 2018. The economic statistics continue to disappoint.

So with this in mind, why have equities performed so well in the first quarter? We would put forward three reasons.

Firstly there was a rebound from the decline in the fourth quarter of last year, when global equity markets fell (13.4%).

Secondly, and perhaps more crucially, the U.S. Federal Reserve did a volte-face in the direction of interest rates. Over the last two years the stated policy direction was that interest rates would be rising slowly but in line with economic growth. In view of the softening economic backdrop the Fed conceded that the next move could actually be a downward movement/cut.

Thirdly, a more ephemeral reason but one that is vital to understanding stock markets: they are forward looking. Equity markets usually act as discounting mechanisms. Simply put, this means that due to all the hundreds of billions (if not trillions) of dollars being traded every day by millions of people and, these days, computer programmes, all known news is almost instantly reflected (or discounted) in movements in stock prices.

Therefore it is tomorrow’s news which drive the market: If you wait for the news to arrive, the markets will already have moved on.

So looking to the future, what do investors see? With China having recently launched a new economic stimulus package, and possible lower interest rates in the U.S and around the world, the inference must be that the economic slowdown will be temporary and will be followed by more robust conditions from 2020.

Whether this is the actual outturn of events of course remains to be seen, but markets are clearly looking beyond the short term economic news.