Mark Lister, 5 November 2019

It was only a month or two ago that investors were fretting over an inverted yield curve, waning economic growth, and a looming recession in some parts of the world.

Interest rates were expected to collapse further as central banks were forced to embark on aggressive policy stimulus, and negative interest rates were even being touted as a possibility in New Zealand.

Recently, we’ve seen a turnaround in sentiment that has pushed US shares to new record highs, while the talk of recession has subsided. So what’s changed?

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While many economic indicators still look mixed, they haven’t been as bad as expected and a few have provided some cause for optimism.

Job creation in the US has been better than expected, the services sector in the world’s biggest economy is in good shape, while the US consumer remains strong.

The manufacturing sector is still in the doldrums across the world, particularly for the automotive industry, but things appear to have stabilised. In China, a private manufacturing survey improved for the third consecutive time last month, with new orders rising at the quickest rate since January 2013.

Corporate earnings growth has surpassed expectations over the last few weeks. With 70 per cent of US companies having now reported results for the September quarter, more than three quarters have posted higher earnings than expected.

Trade tensions have also eased a little, with signs of a thawing in relations between President Trump and his Chinese counterparts.

The growing rivalry between the US and China won’t disappear anytime soon, although there is a strong incentive for both sides to make some progress over the coming months. The 2020 US election is now less than 12 months away, and Trump will want to solidify his position as a master negotiator.

Brexit has been kicked to touch until next year, and the chance of a messy no deal seems more difficult to envisage given the opposition to such an outcome.

All of this has seen recession fears subside and, and helped push the S&P 500 to fresh record highs.

The improving sentiment has flowed through to New Zealand as well, with recent moves in interest rate markets a good example.

A few short weeks ago another OCR cut this month was viewed by many as close to a certainty, although it now looks much more like a 50/50 call. This isn’t due solely to less pessimism from offshore, but also because of better news on the local front.

Fonterra recently increased its estimate of this season’s milk payout from $6.75 to $7.05, based on the midpoint of its forecast range. That would make for the highest in six years. Other domestic indicators have remained stable, while business confidence has at least stopped getting worse.

Markets are entering the traditionally buoyant end of year period on a sound footing. Since 1950, November has been the strongest month of the year for US shares, while December isn't far behind as the third best performing month.

If nothing comes out of left field to destabilise things, it feels like a few clouds have cleared and the final stretch of 2019 could be a slightly brighter one.


This article was also published in the NZ Herald on 5 November 2019 under the title "Mark Lister: Maybe things are looking up ...".