Risk assets performed particularly well in the early weeks of 2013, especially share markets, with gains for 2013 so far in local currency terms for the US S&P 500 and the Australian ASX 200 of respectively 6.1% and 6.0% and even bigger gains for Britain’s FTSE 100, 7.6%, and Japan’s Nikkei, 7.7%. Among the factors driving out-sized share market gains are mostly more positive than expected pointers to global growth in 2013, a tempering of key concerns about special factors that may constrain growth, accommodating monetary policy settings in much of the world and better than expected corporate earnings reports from US companies in particular. In short, global financial markets have shifted view sharply over the past month from expectations that the 2013 global growth outlook cup is more than half empty to perhaps it may be more than half full. One issue is whether risk markets are starting to over-stretch?
Most of the factors driving the gains in risk markets are still in play. Recent US economic reports remain consistent with an economy in recovery. January non-farm payrolls rose by 157,000, a little short of market consensus (+175,000), but with hefty upward revisions to earlier months including a move up in average monthly non farm payrolls through 2012 to +181,000 from an earlier estimate of +153,000. Consistent growth in employment is one key ingredient of a sustainable economic recovery.
Rising household wealth driven by share market improvement and more particularly rising house prices (the Case Shiller 20-city house price index rose by 0.6% in November and was up by 5.5% compared with November 2011) is another. There is also increasing evidence that this improvement in the financial position of households is showing in stronger household spending. New car sales are running at a five-year high and private consumption spending accelerated to a 2.2% annualized pace in a Q4 GDP report that otherwise showed a quirkily weak -0.1% annualized growth rate. The weakness in the GDP report, however, was down to temporary factors, a sharp fall in government spending and a pull back in inventory accumulation, which combined held down growth by 2.6 percentage points on an annualized basis.
Importantly, the US Federal Reserve continues to underpin US recovery prospects with a very accommodating monetary policy position – near-zero official short-term interest rates and a continuing bond and mortgage paper buying adding liquidity and helping to hold down longer-term interest rates.
The signs of economic improvement in the US are encouraging and in Laminar Group’s view are likely to be sustained through 2013. We also see Chinese growth improving through the year, which in time will assist Australian growth prospects. All of this implies risk assets improving further through 2013, but not at the pace of the past month or so. Indeed, the risk of pull-back in risk markets is mounting, but marking in our view a pause in what is still a bull market, not the beginnings of a downturn.