The Sun is shining on Wall Street again

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The stock market has gone from inconsolable to imperturbable over the past six months,’ Michael Santoli told CNBC.

The S&P 500 is only shy of last September’s record high. Wall Street tends to set the tone for global equity, so there’s no wonder the seven-month high pan-European Stoxx 600 Index. Partly because of improved data.

Following the wobble of last year, the US economy is regaining strength. “Mortgage applications… and durable goods orders indicate the ship’s steadyness,” Tan Kai Xian said in a note from Gavekal Research. Other positive news has improved both the Chinese and the US production data.

The two superpowers can also be on the verge of a trade agreement and another development can boost trust. Furthermore, the section of the inverted yield curve (a recession signal, as we noted last week) is back to normal.

With 180,000 jobs created in March and 3.8 percent unemployment, US jobs continue to be strong, the lowest level ever since 1969. Average hourly wages grew by 3.4% year-on-year, which is good for consumption. The result of the tight labor market and wage growth is that corporate profits have been under pressure.

In the Financial Times Andrew Edgecliffe-Johnson says that companies “increasingly struggle” to pass on wages, transport and raw materials costs to customers. The profits of US companies have been squeezed not only because of rising wages, but also because of the recent oil prices spurt that increased 32 per cent in the first quarter after Russia’s production cuts and the Opec oil exporters cartel.

As a result, earnings growth for S&P 500 in the second quarter is currently flat, Michael Mackenzie notes in the Financial Times. But markets believe that revenue growth will accelerate later this year as “center banks recognize the limits of policy enhancement and stand ready to make it easier.” A “Goldilocks” scenario is back, says Justin Lahart in The Wall Street Journal.

It now appears fairly clear that “the first-quarter soft patch in the economy was actually a patch, and that it will look much better in the second quarter.” Indeed, at its latest meeting, the Federal Reserve’s message “that it does not anticipate raising rates this year looks like a tag into a dovish territory is too difficult.” The positive news for investors is, however, that the Federal Reserve is likely to take some time, and much more data, to consider revisiting its new monetary tightening approach.

For now, the US economy is strengthening and the Fed bode well for the US and global liquidity. “The central bank might eventually pull the punchbowl away, but the drinks are on the house now.” So the global stock market rally led by the US looks set to continue.

Expect small caps to lead the way, says Xian, they tend to do best with a steepening yield curve in a recovery phase.

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