The reaction to Mr Trump’s speech last Wednesday shows that the equity market rally of recent months has not been driven exclusively by the promise of huge infrastructure spending and tax cuts. The President was vague in his policy proposals, but the economic data are doing the talking. New orders from the non-manufacturing ISM rose to an 18-month high in February. The 4-week average for initial claims dropped to 234.25k in the week ending February 25th, the lowest since April 14th 1973.
Labour market indicators have been far more reliable than the GDP numbers. A year ago, stock market bears were preoccupied with secular stagnation. However, the current economic expansion is now the third longest in history. It has stretched for 93 consecutive months since the trough in June 2009 and could well extend beyond July 2019, beating the record of 120 months prior to the dotcom bust.
Snap’s successful IPO underlines the potential upside for equities. Cloud services have significantly reduced the cost of starting and running a business. They also allow companies to innovate more quickly. Intense competition between cloud service providers is driving prices down too. A rising equity market will inevitably push Treasury yields higher. However, the flattening at the long-end of the yield curve mirrors the structural disinflation wrought from tech disruption. The flatter curve is positive for the S&P 500. The reverse earnings yield gap with 10-year Treasuries suggests equities remain cheap.
Summary
- Strong ISM surveys and consumer confidence last week
- ‘Hard’ data positive too: initial claims drop to fresh lows
- Structural disinflation reflected in flattening of the yield curve – a good sign for the stock market
