24 Oct Market Commentary – October 2019
Key Global Trends – bond yields snapback
Trend signals for major markets remained unchanged last month. Though they remain in a sharp downtrend, global bonds yield finally bounced last month as the US and China agreed to resume trade talks and the US Federal Reserve indicated it might not need to cut interest rates as aggressively as the markets had thought.
Equities are still trending up, and withstood the rise in bond yields, but the uptrend has flattened in recent months as markets approach previous record highs. The $US continues to grind higher, supported by ongoing relative strength in the US economy. Risk-on sentiment saw gold prices edge back last month, but the trend remains firmly up for now.
Global Equities – Fundamentals Update
As seen in the chart pack below, the uptrend in global equities so far this year has been led by PE valuations rather than earnings, with the latter in turn supported by the decline in bond yields.
Forward earnings have flattened out this year, reflecting ongoing downgrades to the expected pace of earnings growth this year and next. Until such time as earnings expectations begin to level out, further gains in equities will be reliant on further gains in the PE ratio – which at 15 times forward earnings as at end-September is at least still below the previous highs of around 16 last seen in 2017.
Can the PE ratio rise further? Current low bond yields remain valuation-supportive, so the degree to which bond yields potentially rebound further in coming months will be important. That said, to the extent bond yields do rise somewhat, this might presumably be associated with an improved outlook for the global economy and earnings expectations.
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