Financial markets continue to live up to their reputation for getting ahead of themselves. This week’s catalyst was the trade armistice between the US and China, which helped push global equity indices further into record territory. But investors should not dismiss the prospect of renewed skirmishes between the two powers. Nor can they rule out more aggressive posturing from Washington towards other trading partners that run large trade surpluses.
Truces can be fragile. The primary consideration for investors is whether the “phase one” deal fosters greater confidence among global businesses and spurs higher levels of investment and economic activity. The current bullish sentiment in the markets mainly reflects how central banks— channelling the mantra “If you build it, he will come”, from the US baseball movie Field of Dreams — have done their job of crushing market volatility through low interest rates, and have laid the ground for an economic rebound.
Investors need to see more than just green shoots and bullish analyst forecasts of stronger earnings growth.