Skipton Financial Services
Monday, May 22, 2017 - 12:14

Market update – favourable outlook for businesses drives market growth

This continues to be a positive period for stock markets. For all the political uncertainty taking place around the world, the majority of leading markets are performing well. Behind the headlines, the global economic picture looks encouraging.

Markets less concerned by major events

There has been so much political change around the world over the past 12 months, with events like Brexit and Donald Trump’s election victory confounding many expectations. But despite all the upheaval and ongoing speculation, markets have largely shrugged off any negativity and continued to perform strongly.

Indeed many leading global stock markets continue to set record highs. The MSCI World Index – which measures global stocks – was setting new records on an almost daily basis at the end of April and early May.

The leading US indexes – the Dow Jones and Nasdaq – have also reached new highs. In early May, European stock markets closed on a 20-month peak. Closer to home the UK FTSE 100 has been steady and remained above the 7,000 mark since December.

When you consider the long road of Brexit negotiations ahead – and the UK general election in June – there are potential reasons to expect market volatility. But so far, the outlook for shares remains positive. The recent French election – whilst delivering a more favourable market outcome than the US and Brexit – took place against calm waters.

Scott Ashworth, Senior Technical Research Adviser

Markets have spent the last year especially dealing with political change, but that hasn’t stopped them performing well over this period.

So what is driving performance?

In a nutshell: corporate earnings. Many companies from around the world have been able to report on positive performance this year, which is boosting share prices and, with it, shareholders and investors.

The performance of European shares, which have endured a difficult period, has been one of the highlights of 2017. More than 80% of European companies have beaten analyst expectations for revenues.

Scott stated, “The real focus of markets has been on the positive company earnings data and reasonable economic outlook – in Europe especially.

“Why hasn’t there been more market volatility around Brexit and politics? For all the noise around it, the reality is that we are still a long way from formal talks beginning and there are two years to agree the terms of the UK’s departure from the EU.

“We’ve now had two of the four major European elections that are scheduled to be held this year (Netherlands and France), which have delivered outcomes widely anticipated. The UK and Germany elections are expected to follow suit.”  

US grapples with interest rates

It is still a slightly different story over in the US, as the big changes that come with Donald Trump’s presidency continue to become embedded. It’s no secret that Trump’s first 100 days in charge were not plain sailing for the President, with a number of his pre-election pledges proving difficult to implement.

From a market point of view, his planned tax cuts and scaling back of regulations has undoubtedly been met favourably – if Trump succeeds, the earnings prospects of US companies will be enhanced. Trump is said to be working to a timetable of introducing these major tax cuts by August.  

But a more pressing matter could be interest rates. In March, the US Federal Reserve increased interest rates for the second time in three months, lifting base rate from 0.75% to 1%. This is the highest it has been since the credit crunch crisis of 2008.

There is speculation that the Federal Reserve will increase rates a further two times over this year, but markets remain sceptical over whether this will actually happen. Scott added, “If further interest rate rises do become more likely, or if Trump’s tax plans fail, it could impact on markets.

“Markets are also wary of some of Trump’s other plans and political intentions. So they’re trying to work out which industry sectors would benefit or be held back, should he succeed with his aims.”

Our view

Mark Elliott, Head of Technical Research  

Overall, markets have performed very well since February last year – with the main drivers evidently originating from the US and UK, and support from a recovering global economy.

There is of course plenty of uncertainty over the future and this and other events could cause some short-term bumps. But for investors, it’s about time in the market, not timing. Whilst markets rise and fall over short-term periods, it’s their long-term record which really matters.

 

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