Return of the bull?

Hello, it's Friday the 16th of May. Let's have a look at what's been going on in markets over the past week or so. We are firmly into mid-May now, and generally speaking, it's been a decent month for equity markets on the whole, coming on the back of a pretty wild rise in April, where markets sold off aggressively following the so-called 'Liberation Day' tariff announcements. As rhetoric weakened towards the end of that month, we got a big rally and in fact, if you look back on April's returns over the entire month it largely masked that volatility that you felt intra-month. But that positive tone we saw in the second half of April has continued into May and major markets over the course of May now, the last couple of weeks, are up sort of 2s, 3s, 4s percents in their local currencies, so sort of grinding higher. Several sort of repeated positive days on the trot and so a much more positive tone and a positive trend in markets evident over the last few weeks.

And so, so far, again very short term, if you believe in the old adage of 'sell in May and go away', so far you'd have been on the wrong side of that trade but overall it's pleasing to see a more positive tone in markets. Clearly there's still news flow out there, lots going on but less of it seems directly market related. There's more sort of politics, geopolitics. We've got President Trump in the Middle East. We've got ongoing negotiations between the UK and the EU in terms of can we work closer together and those sorts of things in the news, but it's not really quite as impactful in terms of sentiment, most importantly, and that creation of uncertainty and volatility that we saw over the last couple of months.

The US stock market is actually teasing us with close to a bull market from the bottom in April, up about 18.5% from the bottom and Nasdaq is is up a quarter. So it's technically back in a bull market having obviously sold off substantially over the start of April. It's tempting to conclude looking at what markets have been up to that we're sort of out of the woods and you know the tariff news is sort of long forgotten. The reality of course in that is the main set off was likely caused around uncertainty of the quantum of tariffs and the fact that we were expecting some sort of tariff change to come in. It was widely telegraphed during the election campaign, but clearly the announcements in early April on 'Liberation Day', were far greater, more wide ranging and in some ways sort of random than perhaps the market was expecting and all of that led to lack of confidence in the process and in how it would be delivered. It led to a sell-off due to the complexity and everything else. You know now we're moving into an era where you've got that baseline 10% pretty much everywhere. You've got a couple of exceptions coming in, a few trade deals coming in the mix. The UK being example of that perhaps not a wide-ranging and all-encompassing deal, but evidence there are still deals to be done. But most importantly, you know the big deal that was well, the big tariff impact really was China and that sort of bilateral trade between the US and China, which was looking like escalating, getting tit-for-tat retaliations. It seems de-escalation is the name of the game today and you know there's a lot of news related to who blinked first, who came to the table first. In some ways it doesn't really matter. What is clear is that there is scope for negotiation, scope for winding down of some of this extreme aggression that we've seen from a tariff perspective over the last month or so. Where we end up though it still is uncertain. So we've got this interesting paradox in the one hand it's relieving to see markets on a firmer footing and with a bit of a spring in their step once more. But ultimately, the cause of that uncertainty, while the degree may be less today, the principle is still there, you know, and you think about where we are in terms of what comes next in terms of business uncertainty, consumer uncertainty. Their propensity to invest or spend. Is it as high as it was a few months ago, even a month ago, or has this uncertainty led to a degree of caution, a degree people wanting to preserve savings, to sit on their hands, to defer spending, defer investment? And that has an obvious and material consequence in terms of the economy further down the track. These answers are still unknown today. They'll be unknown for quite some time, really, but it is extraordinary and perhaps over the top to see such a rebound really. We're back to where we were, but there is still greater uncertainty, there will be sort of unintended consequences of these tariffs. And so, you know, I think it's sensible to be happy with that gain in markets, but also to treat it with a healthy degree of respect and caution. And a reminder of course, when looking at valuations, there's been some corporate earnings come out over the few weeks and months. Generally they've not been too bad, but nevertheless the market's recovered in the US back to where it was. It means that valuations in round numbers are back to where they were as well, and they were looking expensive a couple of months ago, it means they're again looking a little bit on the expensive side again today.

You know it has meant that this big move back up in in equity markets, we've had some earnings over this period of course but overall, nothing's dramatically changed in the earnings picture. So we've got markets moving back to where they were, and it implies, and in fact reality is that valuations are back roughly to where they were. So if you're expensive a month ago, you'll be expensive today. Case in point of that, clearly, the US, the market that we've been saying for some time is looking expensive. You know in no small part due to that concentration in the Mag-7 and their valuations, but you've had that rebound to pull us back into firmly expensive territory for the US.

Better valuations are still around. If you look at Europe, you look at the UK. Asia even and emerging markets are looking cheaper. But they've got obviously different challenges and different opportunities as well. But overall, you know, it's just worth bearing in mind that that reset in markets which was starting to look like a buying opportunity, was starting to look like things cheapening up, certainly in terms of the US, that's now sort of largely behind us, we're back into expensive territory when we look at the US market.

Overall though, you know, things look okay to us. We believe that economies are rumbling along fairly well. UK's GDP came out yesterday, not too bad actually in the first quarter. Inflation data in the US actually looking a little bit easier than perhaps expected. But again, all of this data is subject to what's coming next. It's all backward looking. What is coming next? In terms of the tariffs and what that means for the state of economies, we'll only really start to see once it gets baked into the numbers. That's it from me. Have a good weekend when you get there, and we'll see you next time.