The 7th year of the current bull market started with steady economic growth domestically, weakening growth in the emerging markets and stagnant growth in Europe and Japan. Stocks were feeling the weight of the long bull market and the anemic earnings growth then being reported were the perfect fodder for some profit taking.
Then Mr. Mario Draghi spoke. On Jan 22, the ECB announced its version of the quantitative easing program to the tune of 60 billion Euros of monthly purchase of government and agency debts. The disappointing earnings were then quickly forgotten and stocks marched steadily upward during February and had since vacillated sideways in March. For the quarter, S&P 500 gained a grand total of 0.95%.
As we end the first quarter of 2015, it appears that the whole world is easing monetary policies. The Northern European countries including Sweden and Finland have all lowered rates multiple times. Now Asian Pacific nations are also joining the easing parade. The central bankers of India, Australia, Singapore, China and Indonesia have all provided monetary accommodation in response to global policy trend.
With relative economic prosperity, the US Federal Reserve stands in sharp contrast with the rest of the world and prepares to escape from zero interest policy. But in the March press release after the FOMC meeting, Janet Yellen fired a direct shot across the globe. By downgrading future economic growth and singling out the strength of the dollar as an impediment to US economy, Ms. Yellen was telling the Draghis and the Kurodas of the world that the United States would not simply sit idly by if the dollar were to strengthen further. On that announcement, the dollar fell and the market rose.
The reason that we are so preoccupied with the macroeconomic environment is because it has a direct bearing on corporate earnings. With slowing emerging market growth, the engine of demand growth for energy and commodities has receded. Coupled with the increased production to meet such demand growth, the world is now awash in oil and its price has fallen over 50%. The strength of the dollars has also decidedly lowered earnings growth rate for all the multinational companies. As a result, the estimated earnings for all the S&P 500 companies will come in at $250.7 billion, a contraction of 3.8% compared to the first quarter of 2014.
Yet despite the myriad of headwinds, we remain constructive on US equities in the near term since global fixed income is less attractive than US fixed income and US fixed income is less attractive than US equity. The derailment of the continuation of the current bull market could come in the form of inflation or recession. Neither of those can yet be credibly forecast.
Dong Hao Zhang
President & Chief Investment Officer Evla Hills Investment Management