Global Stocks Post Strongest First Half in Years, Worrying Investors
Market watchers wonder whether the strong showing heralds smooth sailing or choppy water ahead
HONG KONG—Global stock markets collectively had their best opening half-year in years, a strong run capped by turbulence this week that could be a harbinger of greater volatility in the second half of the year.
All but four of the 30 major indexes representing the world’s biggest stock markets by value have risen this year, a first-half performance unmatched since 2009, according to an analysis by The Wall Street Journal. In the past 20 years, only four first-half rallies have been as widespread or better than the current global surge. Two of them preceded sharp market crashes, while two others came at the beginning of multiyear bull markets.
In the U.S., the tech-heavy Nasdaq Composite surged 14%, its best first half since 2009. The Dow Jones Industrial Average and S&P 500 each rose 8%. But the U.S. wasn’t alone. Stock benchmarks from South Korea to India to Spain were among the biggest risers over the first six months, all registering double-digit percentage gains.
Investors attribute the broad breadth of the rally to strengthening corporate earnings, improving economies and continued support from central banks. Europe in particular has been the beneficiary of surprisingly stronger-than-expected economic conditions. A sentiment reading of Eurozone businesses and consumers released this week jumped to its highest level since before the financial crisis. In the U.S., strong earnings growth has been a crucial underpinning of the market’s performance. And a resilient tech sector led by U.S. and Chinese giants has had an increasing influence on markets domestically and in Asia.
Despite President Donald Trump’s challenges with parts of his agenda, and political jolts in countries from Brazil to the U.K., stock markets have been unusually steady too. Measures of volatility in the year’s first half were at or near multiyear lows not only in the U.S., but also in Europe and Asia.
The question for stock investors is whether the strong first six months heralds a choppier second half or the start of a multiyear upswing. The data on global rallies offers a mixed record.
A surge in the first half of 1999 preceded the bursting of the tech bubble. The rally to start 2007 came before the global financial crisis. But broad, world-wide gains similar to this year’s also occurred in 2003 and 2009. Both of those were early stages of yearslong market rallies.
High stock valuations and tranquil trading this year have prompted concerns that investor complacency is setting in. Federal Reserve Chairwoman Janet Yellen warned that asset valuations were “somewhat rich.” The S&P 500 trades at about 18 times projected earnings over the next 12 months, around its highest level in 13 years. Still, this forward multiple was above 26 times at the dot-com bubble’s peak in 2000, according to FactSet.
Valuations are more modest elsewhere. In Germany, the DAX trades at less than half its peak multiple in 2000. The Nikkei 225 fetches at 17 times forward earnings, around its average over the past five years.
This week, investors tasted the greater uncertainty that could lie ahead, when top European Central Bank officials offered mixed messages on the future of its bond-buying program. Heads of central banks in the U.K. and Canada also indicated they were pondering when to raise interest rates.
Stocks and currencies gyrated on the concern of less central-bank accommodation, moves reminiscent of the 2013 “taper tantrum” in the U.S., touched off when the Fed signaled a reduction in asset purchases.
“Central banks have created huge distortions in the markets, which are going to be difficult to unwind,” said Colin Graham, chief investment officer of multiasset solutions at BNP Paribas Asset Management.
“But we think they are going to talk hawkish and walk dovish,” Mr. Graham continued, implying that central banks won’t do anything too drastic that risks roiling markets.
The stakes are high. In the U.S., the Dow, S&P 500 and Nasdaq Composite have set numerous records highs in the ninth year of a bull market. Globally, nearly half of the top 30 stock indexes are at or near all-time highs.
“We’re really seeing a synchronized global recovery take shape this year,” said Graeme Bencke, global portfolio manager at Pinebridge Investments in London. “Everything is looking better.”
The tech sector’s rising clout has been key. The five largest U.S. companies by market capitalization are tech- and consumer-related companies, led by Apple Inc. They propelled the Nasdaq to 38 new closing records this year, its most through the first half of a year since 1986.
China’s tech behemoths fared even better. Tencent Holdings Ltd. , the world’s largest videogame publisher by revenue, and China’s largest social network, WeChat, have jumped more than 40% this year. Alibaba Group Holding Ltd. , the online marketplace, surged roughly 60%, pushing the MSCI Asia Ex Japan Index up more than 20% for the year.
Even sectors that have mostly underperformed this year, such as financials, have belatedly joined in. After all major U.S. banks passed the Fed’s annual stress tests, analysts say they look attractive again. Banks including Citigroup Inc. and Bank of America Corp. said they would boost share buybacks and dividends.
Among the few losers this year were energy stocks, thanks to oil’s sharp decline. Exxon Mobil Corp. and Chevron Corp. were some of the Dow’s worst performers.
One irony is that this year’s market gains have come about for different reasons than many expected in January.
Investors then hoped Donald Trump’s election victory would trigger lower taxes, less regulation and more infrastructure spending. Many believed U.S. interest rates would rise, the dollar would strengthen and oil would keep rising.
Abroad, there were worries Mr. Trump’s presidency would spark trade tensions that might hit emerging markets. A close French presidential election loomed over Europe’s prospects.
So far, though, Mr. Trump hasn’t enacted major changes to fiscal policy or taken significant protectionist measures. In France, pro-Europe Emmanuel Macron eventually romped to election victory, allaying fears about the rise of anti-European Union sentiment.
Through it all, the market’s focus has instead remained on central bankers, the pattern since the financial crisis. While the U.S. has raised short-term interest rates four times since the end of 2015, the ECB and Bank of Japan have mostly remained accommodative, helping juice asset prices. U.S. government bond yields have fallen, the dollar has weakened and oil prices have declined.
“It really has been a first half of the contrarian trade,” said Mark Tinker, head of Framlington Equities Asia at AXA Investment Managers, which has $835 billion under management.
Investors point to the pickup in earnings growth as a vital driver of global gains this year. In the U.S., first-quarter earnings from S&P 500 companies increased 14% from a year earlier, the best growth since 2011. Analysts now expect roughly double-digit profit growth this year and in 2018, according to FactSet.
Earnings in Asia-Pacific, excluding Japan, and in Europe, which had disappointed for years, also increased at a double-digit rate in the first quarter.
“Europe has gone from a headwind to a tailwind,” said Mark Matthews, head of research for Asia at Swiss private bank Julius Baer . “There was a fear that the euro was unraveling. The fear is behind us.”
Not every market has rallied. Russian stocks were among the world’s worst-performing equity markets, dropping 14%. Oil’s fall and the possibility of tighter sanctions hit stocks there after their strong surge in 2016. Indexes in Israel, China and Canada were the other rare decliners in the first half.
The tricky part now, investors say, is picking which regions will continue rallying. Bargain-hunting opportunities have been rare and fleeting. Brazilian shares tanked in May amid a fresh political scandal. But global fund flows to the country soared the week after, and the market quickly bounced back.
Meantime, comments from some investors suggest doubts are creeping in.
“We’ve never been in a period like this,” Mr. Bencke of PineBridge Investments said. “It’s like central banks are slowly pulling the rug from under your feet. My hope is they’ll move slowly, and the world will err on the side of caution.”