Global Stocks Are Set to Break a Streak Intact Since the Trump Election

A record-long bullish streak for global stocks is about to fall by the wayside.

The MSCI All Country World Index, a barometer of stocks around the world, is set for its first monthly decline since before the 2016 U.S. presidential election. It is down 2.5% this month, which would be its worst since Jan. 2016, when a steep selloff in Chinese markets dragged global stocks lower.

This month’s decline comes after the index, which captures equity returns from 23 developed and 24 emerging markets, had risen for 15 straight months through January, its longest consecutive streak of gains. That included gains every month in 2017, the first time it had gone a full calendar year without a monthly drop.

And the rally gained even more momentum in January, when the index rose nearly 6% in one of its best starts to a year.

But the calm in financial markets came to a screeching halt earlier this month, when rising bond yields and a spike in market volatility sent stocks swooning.

More than $5 trillion in market value world-wide was wiped out from Jan. 26 to Feb. 8. Many markets, including in the U.S., Japan, China and Hong Kong, fell into correction territory, down at least 10% from their recent highs.

The world index fell 9% from Jan. 26 through the bottom in early February. It has since risen 5.5%, tracking how many markets around the globe have bounced back over the past few weeks. Analysts are confident that the rebound will continue.

“So far there have been no signs of ‘end of cycle themes,’” says Sean Darby, chief global equity strategist at Jefferies in Hong Kong, noting that corporate earnings growth remains strong and analysts continue to revise their earnings estimates higher.

“The evidence continues to build of a broadening in U.S. and global economic growth,” he says.

In Asia, Japan’s Nikkei 225 Stock Average slumped about 12% from its late January high up to Feb. 14. It has since recovered about half of those losses. Similar trajectories hold true for China and Hong Kong stock benchmarks.

Other markets, such as Australia and Singapore, are back in positive territory for February.

And in the U.S., the S&P 500 is only 3.3% from its record close. The Nasdaq Composite is just 1.1% from last month’s all-time high, as tech stocks have bounced back. The NYSE FANG+ Index–which tracks tech heavyweights such as Facebook, Amazon.com, Netflix and Google parent Alphabet, as well as Chinese tech giants Alibaba Group Holding and Baidu–hit a record high on Monday.

Still, risks remain. Since 1980, the world index has averaged a 15% pullback from a recent high each year. That means its recent pullback was only about half of what typically takes place in a given year.

The worst occurred during the 2008 financial crisis, as the index dropped as much as 51% that year. The smallest pullback took place in 2017, when it fell 2% from its high to its low.

And should bond yields keep climbing at a rapid pace, that could hinder stocks’ recent rebound.

In a note to clients over the weekend, Goldman Sachs warned that if the benchmark 10-year Treasury yield surged to 4.5% by year end, stocks could fall 20% to 25%. The bank doesn’t expect that to come to fruition, indicating its base case is for the 10-year yield to hit 3.25% by the end of the year. It settled at 2.862% on Monday.

“This is the battle in financial markets at the moment,” says Torsten Slok, chief international economist at Deutsche Bank Securities. He noted that strong economic and earnings data should be good for both bond yields and stock prices but that “we will have a problem once the grind higher in Treasury yields begins to have a negative impact on consumer spending and capex.”

Source: The Wall Street Journal

Jr Trader Alexander Kumanov

Original Post: Global Stocks Are Set to Break a Streak Intact Since the Trump Election

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