The Daily Prophet: Stock Bulls Are a Little Less Ashamed These Days

Connecting the dots in global markets.

Stocks did it again. The S&P 500 Index chalked up another record today and equities globally could do the same in a matter of days if the optimism holds up.

What's encouraging is that the upswing isn't a matter of smoke and mirrors. It's actually being fueled by better fundamentals, such as a stronger economy and companies posting growth in earnings, rather than gaining because from some vague promise of tax cuts. Although the rally has left the S&P 500 trading at three times book value for the first time since 2004, market-capitalization weighted earnings likely rose 10 percent in the fourth-quarter from a year earlier, according to data compiled by Bloomberg. Of the 358 members that have reported results so far, 72 percent have shown profit growth.

"What we're optimistic about is, the pace of global growth is picking up,'' said Richard Turnill, the global chief investment strategist at BlackRock Inc., which manages about $5 trillion. "We still think consensus expectations are lagging the actual economic data this are coming out.''

Besides stocks, one of the big beneficiaries of the optimism sweeping global markets is emerging-market debt. The extra yield demanded by investors to own debt from developing nations is the lowest since 2014. One would have to go back to 2010 to find the last time the economic data from emerging markets was beating estimates as consistently as now, according to Citigroup Inc. indexes. Goldman Sachs Group Inc. said it's bullish on the bonds, but just avoid countries likely to be in the firing line of President Donald Trump. That means you should favor investment-grade debt from Central and Eastern Europe, the Middle East and Africa.

One country not in Trump's firing line, at least so far, is Canada. Prime Minister Justin Trudeau traveled to Washington today to meet with Trump. The two leaders issued a joint statement stressing the importance of cooperation to promote economic growth and  advance “free and fair trade.” Canada's dollar has appreciated 4.18 percent the past three months against a basket of nine other major currencies, the most among the group, data compiled by Bloomberg show. Canadian household confidence is the highest level since September. Shipments of energy products rose to C$8.52 billion ($6.47 billion) in December, the highest since November 2014 and almost double last year's low.

In what may be more a sign of optimism about a stronger global economy than of worry, there may be about a drop in trade stemming from Trump's policies, municipal bond investors are bidding up prices of debt issued by the ports of Los Angeles and Long Beach, the nation’s two largest shipping terminals. The difference between yields on some of their most frequently traded securities have drawn closer to benchmarks since the November election, indicating investors perceive less risk, according to Bloomberg News's Jordyn Holman. Fitch Ratings said this month it expects modest growth in cargo traffic as international trade tracks the broader economy, with ports a “relatively low credit risk.”

At least high oil prices may not be a drag on consumer spending and growth. Crude futures slid as much as 2 percent in New York today even though Saudi Arabia told OPEC that it cut oil production by the most in more than eight years, going beyond its obligations under a deal to balance world markets. What gives? It turns out that as OPEC’s supply cuts are tempered by a revival of shale drilling in the U.S., where oil drillers increased the rig count to the highest since October 2015 and production surged. Oil has fluctuated above $50 a barrel since the Organization of Petroleum Exporting Countries and 11 other nations started trimming supply on Jan. 1 to help ease a global glut. That spurred drilling in the U.S., the world’s biggest oil consumer.

It's a safe bet that investors worldwide will be focused on Federal Reserve Chair Janet Yellen's semi-annual testimony to lawmakers Tuesday and Wednesday. Yellen is expected to keep the Fed’s options open in regards to interest rates ahead of its next policy meeting in March. While the market is pricing in about a 30 percent chance of a hike, several Fed policy makers have argued a rate increase shouldn't be ruled out. It's interesting that a survey released by the New York fed today showed that U.S. households’ expectations for consumer price inflation rose in January to the highest level since mid-2015.

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