Total US employment, having stalled in recent months, is now accelerating again. The pace of recovery is in stark contrast to post-GFC. It took five years for employment to regain pre-GFC levels. At the current rate, that mark would be reached in 2022. There remains a large gap with pre-Covid employment — about 11 million jobs. This helps hold wage inflation in check for the short-term at least.

 

But if the recovery continues at its current pace it is hard to see the Fed holding to their stated position of no interest rate increases until 2023.

 

Consumer spending is strengthening in the wake of stimulus payments. Consumer confidence indicators are also breaking higher.

 

The US Purchasing Managers Index (PMI), a gauge of sentiment in manufacturing and services, remains elevated at around 65 (on a scale of 1 to 100). The record is 70, achieved in the mid-1980s. Business confidence in Europe is also rising according to surveys, despite a surge in new cases.

 

Market breadth remains a supportive factor for equity markets. Some 94% of stocks in the S&P 500 are above their 200-day moving average. This is more than at any point since May 2013.

 

This doesn’t mean we can’t see a correction or consolidation – but it makes it less likely that we are at a market top. A typical sign of extended market tends to be narrower and narrower markets in terms of drivers – and we are clearly not at that point.

 

Inflation remains the key risk that can de-rail markets. There are signs of inflationary pressure in specific areas in supply chains. The issue is how quickly – and to what degree – this flows through to wages. The link to wage inflation has not been present for the past 20 years – and we are a long way from employment capacity. Nevertheless, this remains an important factor to watch.

 

Chinese official business conditions PMIs rose solidly in March, particularly for non-manufacturing, after a brief COVID/policy tightening lull in January and February, suggesting that growth remains strong. The Caixin manufacturing PMI softened slightly though.

 

Australian data was mostly strong. The Australian Bureau of Statistics (ABS) confirmed that retail sales fell in February, but by less than a first-reported decline of -0.8%, as lockdowns in Victoria and WA impacted. A rebound is likely in March. Meanwhile, home prices rose 2.8% in March, which was their fastest pace since 1988.

 

Credit growth was soft, but there was another strong reading in housing finance commitments (they fell -0.4%, but after a 10.5% surge in January they are up 49% over one year), which points to a further acceleration in housing credit growth. Building approvals surged in February, helped along by HomeBuilder, the AIG’s manufacturing PMI was very strong in March, the ABS’ survey of job vacancies confirmed the strength in the labour market (with a 13.7% rise over the three months to February leaving them up nearly 27% over one year), as did a rise in payroll employment above year-ago levels and the trade surplus remained big in February, albeit less so than expected.

 

Bond markets have been a bit more stable lately – particularly outside the US, helped by a combination of central bank action, the renewed rise in global coronavirus cases and a pause after bond markets became oversold. However, it is still too early to conclude that the bond tantrum is over and there could still be more upwards pressure on yields ahead, as headline inflation spikes higher and economic recovery continues. This could in turn drive more volatility in shares.

 

Shares remain at risk of further volatility. Looking through the inevitable short-term noise however, the combination of improving global growth, helped by more stimulus, vaccines and still-low interest rates, augurs well for growth assets generally over the next 12 months.

 

We are likely to see a continuing shift in performance away from investments that benefitted from the pandemic and lockdowns - like technology and health care stocks and bonds - to investments that will benefit from recovery - like resources, industrials, tourism stocks and financials.

 

Global shares are expected to return around 8% over the next year but expect a rotation away from growth heavy US shares to more cyclical markets in Europe, Japan and emerging countries.

 

Australian shares are likely to be relative outperformers, helped by better virus control, enabling a stronger recovery in the near term; stronger stimulus; sectors like resources, industrials and financials benefitting from the rebound in growth. This will likely come as investors continue to drive a search for yield, benefitting the share market as dividends are increased, resulting in a 5% grossed up dividend yield. 

 

Cash and bank deposits are likely to provide very poor returns, given the ultra-low cash rate of just 0.1%.