Government bonds had a bad month. The rise in yields is still being driven primarily by strong growth and higher inflation expectations, together with the prospect of rising US Treasury issuance to pay for the tax cuts. After a strong start to the year this began to spill over into equity markets by the end of the month and this carried on into the first few days of February. Janet Yellen chaired her last Federal Open Market Committee meeting – the next move by the Fed is likely to be in March once Jerome Powell has taken over.
For the companies that have reported so far, the blended earnings growth rate for the S&P 500 is 13.4%. All eleven sectors are reporting earnings growth for the quarter. 75% of S&P 500 companies have reported positive EPS surprises and 80% have reported positive sales surprises.
Global equities have exhibited some nervousness in the past few days after yields on the benchmark U.S. Treasury reached levels not seen in almost four years. The question is how much scope there is for yields to move higher. Perhaps against expectations, moves in interest rates can often be sharp. It does seem likely that we will see resurgent volatility in 2018, but this doesn’t mean stocks can’t continue to move higher, boosted by continued earnings growth and a synchronized global expansion. In addition, if we look back at analogous periods of tightening (1994 and 2004), after an initial sell-off markets staged a good recovery.
Asset allocation was broadly unchanged during the month however we did reduce exposure to the UK equity market at the margins to add more exposure to Asia – we think the region is well placed to benefit from a cyclical upturn coupled with favourable structural trends (demographics, consumption
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This information has been produced by Jordan Buchanan using data supplied by Quilter Cheviot, and from publicly available data sourced from Bloomberg.com