Against the backdrop of additional stimulus talks, robust vaccination rollouts and strong company earnings, share markets were able to extend their gains across all regions in April.
In addition, the yields for longer-dated bonds finally stabilised, halting the upward momentum that we’ve seen in bond yields since the start of the year. This resulted in global bonds posting minor gains during the month, while returns on cash holdings continue to remain insignificant.
Further positive signs in the US
Favourable data out of the US continues to roll in with the nation recording 6.4% in annualised growth for the March quarter, which comfortably exceeded expectations. The result partly reflected the most recent round of stimulus cheques that led to an uptick in consumer demand and economic activity.
The country’s vaccination rollout is full steam ahead with over 30% of the population now fully vaccinated. Anthony Fauci, the top infectious-disease official in the US, recently stated that vaccinating 70-85% of the population would enable a return to normalcy. At its current vaccination rate, the US should achieve this milestone within the next 4 months, which would be an enormous achievement and boost to the economy.
Finally, the Q1 earnings season commenced in April and the early signs have been ultra-impressive. Of the 60% of S&P 500 companies that had reported by the end of the month, a staggering 86% of them beat their earnings expectations.
Inflation yet to fire
Outside of additional COVID-19 outbreaks, rising inflationary pressure has perhaps posed the biggest risk to markets in recent times. However, Australia’s CPI data for the March quarter was underwhelming and came in much lower than expected. Signalling that underlying price pressure still remains rather weak, despite the substantial stimulus that we have seen since the outset of the pandemic.
These stubbornly low inflation levels allow both the government and the RBA to pursue their common objective of stronger employment much more aggressively, with less concern about the market overheating. Such conditions should also allow growth assets, like shares and property, to continue to perform well in the short term.
The Government will once again deliver the details of its Federal Budget on the second Tuesday in May. Although the economic outlook in Australia has improved significantly in recent periods, Treasurer Josh Frydenberg has already hinted that the Government’s big spending is likely to continue.
The Budget looks set to introduce additional childcare subsidies designed to encourage parents to return to the workforce or take on extra hours. Aged care is also expected to receive some attention following the disturbing findings from the recent Royal Commission. It’s predicted there will be additional spending of $10 billion dollars over four years, as well as a sector-focused skills package.
Clean energy and climate change initiatives are tipped to receive funding, while Western Australia is expected to receive an infrastructure package worth $1.3 billion for its road and rail projects. It’s also rumoured that the Government is exploring measures to help women boost their superannuation and enhance their economic security.
Improving global growth and accommodative macro-policy obviously bode well for share markets in the short term, particularly while inflation remains subdued. The key pressure points in the market relate to COVID-related disruptions, increasing bond yields and company earnings failing to keep pace with share prices, and we can certainly expect a degree of volatility and market weakness should there be any sniff of these measures becoming unfavourable.