Rather than slow down, the record-breaking rally in global equities accelerated in the first month of 2018, with little clouding investors’ increasing conviction that the world economy is on firm footing.
The STOXX® Global 1800 Index added 5.3%1 in January when measured in dollars, for its best monthly showing since March 2016. The index posted a 15th straight month of gains, a feat never accomplished in the past two decades. It rose 1.5% in euros after the common currency gained 3.3% against the greenback.
The EURO STOXX 50® Index of blue-chip companies in the Eurozone advanced 3.1% when measured in euros. The pan-European STOXX® Europe 600 Index, which includes companies from non-euro nations, gained 1.7%. The STOXX® USA 900 Index climbed 5.5% to a new record, also its best monthly showing since March 2016.
US economy leaves room for rate increases
Global equities last year posted the biggest annual return since 2013 amid signs of accelerating growth in the world’s major economies, and as accommodative monetary policy in developed nations supported financial conditions and investor bullishness.
On the last day of January, the Federal Reserve’s policy-setting committee described gains in US employment, household spending, and business investment as “solid” and said that inflation remains contained. The central bank reiterated that it foresees further gradual increases in the federal funds rate.
The European Union’s statistics office said Jan.30 that the Eurozone’s gross domestic product expanded 2.5% in 2017, the fastest rate since 2007. A strengthening recovery in Europe is propelling the euro against the dollar. The US currency also slid in the month after Treasury Secretary Steven Mnuchin said that a weaker dollar benefits his country’s economy.
Bond yields rise
Indices struggled somewhat towards the end of January as bond yields rose, threatening the relative appeal of dividends. The STOXX Global 1800 index declined 1.5% between Jan.26 and Jan.30.
The yield on ten-year US Treasurys rose from 2.41% at the end of December to 2.71% on Jan. 31, a level not seen since 2014. Bond yields have remained at historically low levels amid exceptional monetary stimulus from central banks. As the Fed continues to raise interest rates, many investors worry the equity rally will lose a key underpinning of recent years. They see quick moves in bond yields as threatening market stability.
The STOXX® Global 1800 Utilities index was the only one among 19 supersectors to post a loss in January, shedding 0.8%. Utilities rank among the highest dividend payers, and a rise in long-term rates make those dividends less appealing for income investors.
At the other end, the STOXX® Global 1800 Retail index jumped 11%. Amazon.com Inc., which accounts for almost a quarter of the index’s weight, jumped 24% in the month ahead of the company’s fourth-quarter earnings on Feb. 1.
The STOXX® Global 1800 Financial Services index followed with a 7.1% gain, tracked closely by the STOXX® Global 1800 Banks index, which rose 7%.
Greece and Italy lead board
The STOXX® Greece Total Market index led gains in local currencies among 23 developed national markets for a second month in a row, with a 9.1% gain. Investors are slowly warming up to Greek assets as the economy expands and the government sticks to austerity measures imposed by creditors to solve its debt crisis. Greece is readying a new bond sale, although some investors have cautioned the country’s debt levels are still too high.2
The STOXX® Italy Total Market index came in second in January with a 7.4% advance, rebounding from the bottom slot in December. Some investors have said concern about the Mar.4 elections may be unwarranted in view of the country’s strong economic growth. The 5-Star Movement, a populist party that’s a leading opposition force, ruled out calling for a referendum on the country’s euro membership should it win the elections.3
At the bottom of the ranking came the STOXX® UK Total Market index, with a 2% decline. The benchmark’s exporters suffered from a 5.2% gain in sterling against the dollar in January.
Index of the month
STOXX launched the STOXX® AI Global Artificial Intelligence Index on Jan. 23, the first thematic index to select its constituents by means of artificial intelligence (AI) technology.
The index selects companies that invest heavily in AI-related systems. STOXX has partnered up with Yewno, whose knowledge-graph algorithm identifies which awarded patents worldwide relate to AI, hence identifying the pioneers behind those patents.
AI is the science of creating computer programs with human-like cognitive skills that is revolutionizing most industries and services. Businesses invested between $26 billion and $39 billion in AI in 2016 to adopt knowledge-based systems in their operations and accelerate sales and lower costs, according to McKinsey & Co.
- STOXX® Global 1800 Index
- EURO STOXX 50® Index
- STOXX® Europe 600 Index
- STOXX® USA 900 Index
- STOXX® AI Global Artificial Intelligence Index
1 All performance figures are net returns.
2 Reuters, ‘Greek bond sales a litmus test as Athens looks to leave bailout era,’ Feb. 1, 2018.
3 CNBC, ‘EU referendum in Italy is not an option, says euroskeptic M5S party leader,’ Feb. 1, 2018.