The equity market seemed unstoppable despite the very slight price correction that took place during the Christmas period. 2020 has definitely not started in the best way given what is happening in Australia (almost half a billion of living creatures died due to the bushfire) and the quickly escalated conflict between the US and Iran, started from the Iranian General Qasem Soleimani assassination through US drones. A Ukraine Airlines airplane has also crashed following its take-off from Tehran airport (some believe it was destroyed by an Iranian missile, some speak of a coincidence).
Back to our market analysis, equities have experienced a strong rebound that led the S&P 500 to reach the historical highest level of 3288 points last Wednesday. The US stocks index has now the highest ever valuation on an EV/EBIT basis and the highest since the Dotcom bubble PE multiple, meaning that has never be as expensive as now (see below our “Chart of the week”).
On a positive note, Donald Trump confirmed the Phase One trade deal will likely be signed in a matter of few days, maybe even next week (although no confirmation arrived from China). General sentiment seems to recover after one of the least volatile years I can remember.
Investment Grade bonds and Gold have also rallied due to rising uncertainty and geopolitical turmoil. On Friday the infamous market moving Non-Farm Payrolls suggested a weaker than expected job market in the US with “only” 145K jobs added in December and an unemployment rate of 3.5%. Average Hourly Earnings also decelerated to 2.9% compared to the last release of 3.1%. A focal point was the manufacturing payrolls that again confirmed the US currently does not have a strong manufacturing sector as the payrolls declined by 12K (vs +58K in Nov).
We believe the Volatility Index (VIX) is close to the historical minimum point, Gold and the 10Y US Treasuries currently yielding 1.84% have room to grow and definitely offer potential upside although a lot will depend on the Ukrainian plane crash investigation and any further trade negotiation development in the coming week.