Macron wins – what now for markets?

Emmanuel Macron’s win has not generated much excitement across markets. We are seeing the classic market event, whereby a widely-expected outcome has little impact, and indeed sees risk assets like stocks take a slight knock. Macron’s win had been the default expectation for weeks – it could be argued that we saw a bounce for markets, only it came after the first round, when he emerged as the front runner. The second round onlyconfirmed this. Many investors had bought into the market last week, and looked to take profits.

Now that the key May event is out of the way, what can we expect for markets? The Federal Reserve (Fed) does not meet until early June, and earnings season is winding down as well. The European Central Bank (ECB) continues to press on with quantitative easing (QE), even if it has moderated its language on the balance of economic risks. We face a similar set of conditions that prevailed in February, when markets leapt higher once more. Volatility remains low, which usually signals an easier period ahead for stocks. Usually we see some kind of weakness in stock markets over the summer, but this is a post-election year for the US, and such years (see 2013) often see no correction, but rather a steady grind higher.

An interesting observation on seasonality, in periods when the November to April performance saw gains of 15-20% (as they did from November 2016 – April 2017), the average return from May to October was 9.6%, and the May-October period was positive 80% of the time. It looks like those hoping for a big correction could be sorely disappointed.

Earnings season in the US is past its half-way point, with many of the big names out of the way. Overall sales are more than 7% higher compared to a year ago, the best rate of growth in over six years. Earnings are up by more than a fifth, while profit margins have almost reached 10%, a level first hit in 2014.

There are reasons to be worried as the commodity crash in China has been pushed to the back pages by the election of Donald Trump and events in Europe. This deterioration in raw material prices has hurt mining stocks in both the UK and the US, and the drop in oil last week raises the spectre of further falls. Valuations remain elevated, while investor surveys point to almost universal bullishness.

Swing traders will continue to hope for a correction of 5% or more, but we should be open to the possibility that this may not arise, or any pullback may be smaller than this. As we head towards the half-way point for the year, the market seems content to push higher.