Balance sheets and prospects are usually year-end activities. However, December is a good period only for balance sheets, but not for making forecasts. Instinctively, in fact, we tend to project what happened in what we are going to conclude onto the following year. A prediction made in December invariably sounds abstract, mechanical and extrapolative. So let's try now, as March is drawing to a close, to draw up a provisional balance sheet for 2016 and to outline some possible scenarios for the end of the year.
It's like in a battle. Before it starts you think you have an idea of how it will end, but already after a few hours of combat the perspective changes and becomes much more realistic. The first quarter, as we well know, saw a deep and largely unexpected drop in the markets followed by an equally strong and unexpected recovery. The reasons given for the fall were many. First there was geopolitics, then oil in free fall, then Chinese growth, then the renminbi exchange rate, then the general fall in raw materials, then the crisis of confidence in European banks and then the slowdown in American growth.
Of all these causes, the only decisive one, in our opinion, was the last one. There were also many reasons given to explain the recovery of the markets. There have been the strong recovery of oil and raw materials, the stabilization of the Chinese situation with the adoption of expansionary fiscal measures, the stabilization of the renminbi, the easing of fears about European banks, the adoption of aggressive and innovative monetary measures from by the ECB, the apparent renunciation of two rate hikes by the Fed and, lastly, the partly unexpected improvement in US macro data. Here too, of all these causes, only the last one seems to us to be decisive.
US growth is the alpha and omega for the global economy and financial markets. Good growth (especially if surprisingly good) is able to withstand everything and still support the markets. It can withstand even deep regional crises, as was the case with the European crises of 2011, 2012 and 2014 or the ongoing slowdown of the Chinese economy. It can absorb even considerable geopolitical complications, as was the case with the Arab Spring, the war in Ukraine, the growing disorder in the Middle East and the episodes of terrorism that have intensified in Europe and America.
It can easily absorb a halving in the price of oil, as happened in 2015 (from May to the end of the year, crude fell from 65 to 35, while the SP 500 lost only 2 percent). It can also withstand realized (like the one in December) or expected (as was the case throughout 2015, a year in which increases have always appeared just around the corner) rate hikes. Conversely, weak US growth generates a state of deep apprehension in the markets, immediately leads to talk of an imminent global recession even if the data (as was the case in January and February) show good (in Europe) or normal (in China) growth conditions ) in other regions of the world.
Weak American growth also makes any expansive measures by central banks less effective, in the eyes of the markets, which are then seen as desperate. And it exaggerates any problem or pseudo-problem beyond measure, as was the case with oil when it approached $20 or when a European banking crisis was invented in February. If so, oil, China, rates that rise in one month and not the next or the purchases of corporate bonds that the ECB does or does not do are what in English are called red herrings, i.e. very flashy things which tend to attract attention but which in themselves are neither so important nor decisive.
The US economy had a bad fourth quarter of 2015 and, as far as one can understand, a good first quarter of 2016. With the data arriving late by up to a month or more, the markets have taken note (with great surprise) of the weakness at the end of 2015 between January and February. The arrival of (surprisingly) good data from mid-February onwards coincided, not surprisingly, with the generalized recovery in risk appetite. Today it seems to us that things are in balance. The positive growth figures are now taken for granted and are no longer news, also because portfolios, in the meantime, have repositioned themselves making room for risk again. Today, on the other hand, the disappointing data, fortunately still few, which in fact make the stock markets fall back, make the news. The recovery of the markets therefore seems to us to be almost over and, if it wants to continue, it will have to do so much more slowly and with the solid support of continuously and consistently positive macro (and corporate) data.
As for red herrings, which, however misleading they may be, can nonetheless serve the markets to rationalize movements due to deeper factors, oil and industrial metals also seem close to the end of this recovery phase. For all these reasons we downgrade our view of the markets from positive to neutral, at least for the next few weeks. The next appointment, if geopolitics doesn't hold us any more surprises, is the Brexit referendum on June 23rd. Also in this case, American macro data will make the difference. If the data continue to be good, any victory of the OUTs will only lead to a temporary global correction, more modest than that of January-February. If the data, at that moment, will be mediocre, the correction will be more profound, without this being the beginning of a structural trend reversal.
If, on the other hand, the INs win, we will see a further recovery phase for the European stock exchanges which, again on condition that the American data remain at least moderate, will be able to recover all the losses compared to January 2st by the end of the year. What will American growth look like between now and the end of the year? Nothing, at the moment, suggests that we are deviating too much from the 1.5 percent rate that the past six years have shown with great regularity. The Fed probably has a slightly lower unofficial target (between 1.75 and XNUMX percent) and will dose rate hikes around this target, designed to avoid excessive accelerations in wage inflation.
If this is the case, the American stock market will be able to close the year with a modest positive result, helped in this, at least psychologically, by oil which, after the correction that has perhaps already begun, will be able to return close to $50 in the second half of the year . The relative performance of Europe, as we have said, will instead be dictated by the result of the British referendum, which is currently very uncertain.
