The first half of 2017 was one of the best in years, with 26 out of 30 of the top global indices recording gains. This is the best performance since 2009, and only four other similar periods over the past 20 years seen a better performance.
This might seem odd when you examine the global landscape. Donald Trump, Brexit and a host of other problems bedevil investors, and may seem to suggest that the current bullishness is due a reckoning. But corporate earnings continue to improve, while economic recovery has gathered pace around the globe. Even the UK seems to be doing well, with PMI surveys only now beginning to weaken from recent strong levels. All this has been achieved in an environment of accommodative central banks, and while we have seen two US rate hikes and hawkish comments from the European Central Bank (ECB) and the Bank of England (BoE), the loose policy setting is only going to be reduced in a gradual fashion.
Volatility was also lower, providing a stock market rally across the globe with some of the quietest trading of recent times. Indeed, the most volatile day of 2017 occurred in the final week of June, but this sudden upsurge in movement would not even make it into the top 50 list of volatile days for 2016. The small moves we’ve seen mean that the apparently volatile days at the end of June seem like a crisis, and have even been deemed to be the beginning of a more severe correction.
At almost every stage of this bull market, investors have been besieged by reasons why the market should go down. The current fashionable worries include excessively high valuations, with the cyclically adjusted price to earnings (CAPE) ratio being cited as an indicator, combined with comments by the Federal Reserve chair, Janet Yellen, about some markets looking ‘excessively rich,’ along with concerns that central banks will continue to raise rates and tighten economic policy, ending the ‘easy’ time for markets. And of course, we still have Trump and Brexit to contend with.
But, as the chart below shows, the S&P 500, as useful a proxy for global stocks as any, has endured plenty of worries since 2009. Each of these at the time seemed like a reason why the next sell-off would be ‘the big one,’ and each time the market has come back.