Global market backdrop has improved considerably – Wells Fargo

According to the analysts at Wells Fargo Securities, global market backdrop has improved considerably over the past year, and indeed that improvement has been particularly pronounced in recent months.

Key Quotes

“Since their recent low in February 2016, global equities are up roughly 30%, with roughly half that gain having occurred since November 2016. Meanwhile, global commodity prices have shown a similarly favorable performance recently, with gains of nearly 10% since November and roughly 15% since their cycle low in December 2015. The concurrent move in commodity prices and equities is in our view reflective of the broader theme of a firming in expectations for global economic growth.”

“Global equities tend to track real GDP growth in the G20 economies over time, while separately we note that global commodity prices tend to also generally move in tandem with global GDP growth over the long term.”

“However, it seems that the recent pickup in global equities and commodity prices may be somewhat “stretched” relative to the current pace of global GDP growth. A simple regression model over the past 25 years suggests the current pace of equity gains, in the region of 15%–20% on an annual basis, is typically consistent with global GDP growth of around 4% or slightly higher, compared to the latest reading of 3.1% y/y for Q4 2016. Markets are of course forward looking, and some firming of GDP growth is possible in the quarters ahead.  That said, and even allowing for the inherent inaccuracies in our regression analysis, it is in our view unlikely that growth will firm sufficiently toward the 4%-plus region that would typically be most consistent with sustaining the current rapid equity gains.”

“As a result, our bias is tilted toward a moderation and perhaps even a mild correction in global equity markets. Furthermore, given the recent tightly synchronized moves in global equities and commodity prices, it is also possible that a downward adjustment in global equities may coincide with a similar decline in commodity prices.”