In the old days, they said that when March comes in like a lamb it goes out like a lion. The proverb is rooted in the reality that, in the northern hemisphere at least, this month’s weather tends to be changeable and unpredictable—volatile, as we might say in the investing industry. At this time of year, winter and spring contend with one another like bears and bulls in financial markets. When it comes to the seasons, however, we may suffer the odd gale, but we know the days will lengthen, the air will warm. The markets are not so easy to forecast.
Still, March certainly came in like a lamb. The wintry blast of risk aversion lifted around February 11. Since then, world equities are up more than 8%, the VIX Index has fallen from 28 to less than 17 and the price of oil has stabilized. Emerging markets have joined the rally, suggesting that investors are regaining confidence to take long-term value positions. The correlation between daily moves in the oil price and equity markets that had spiked since December is breaking down. Both things suggest investors are focusing on underlying fundamentals again.
Positive data releases are translating into good news for portfolios. Earnings season was not necessarily great — the Q4 decline in U.S. earnings marked the first time there had been three consecutive quarters of year-on-year declines since 2009—but the soft spots in energy and banking were expected and there were few nasty surprises. Last week’s U.S. manufacturing PMI was healthy, construction spending was up, consumers surprised on the upside, and the latest inflation and unemployment indicators looked favorable. Given the improved U.S. economic outlook, markets are again pricing in higher probabilities of modest Fed rate hikes for 2016.
But let’s not forget the other half of that proverb. Is there a lion out there, waiting in the weeds?
In recent editions of our “CIO Perspectives” my colleagues and I acknowledged some serious fundamental challenges to global growth, but argued that the selling was overdone. Some “overselling” has unwound, but the challenges remain:
- The price of oil may have stabilized, but it remains low and the future trend is far from clear.
- China is still going through its economic transition and recent data has been soft: Last week saw the People’s Bank of China cut its required reserve ratio to add to short-term stimulus, Moody’s switch its outlook on the sovereign debt to negative, and a series of weak PMIs that hurt confidence.
- Europe continues with a similar struggle for positive momentum, with soft manufacturing data from Germany and the U.K. and another dip into deflation coming through last week.
And that brings us to the catalysts that could unleash the lion of March: the ECB meeting on the 10th and the Fed meeting a week later. Once again, there is ample scope for market expectations to be met, exceeded or disappointed, and for disruptive signals to be sent. For all the semblance of “normality” over recent weeks, it will be events like these that continue to drive markets, create volatility and dampen the prospects of a sustained breakout by risk assets—at least until we have much stronger levels of confirmation out of the economic data, the earnings outlook and interest-rate expectations. Winter may not have released its grip just yet.
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