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Why are Equity Markets so Resilient?

  • According to Citi analysts, even real episodes of geopolitical conflict have rarely led to lasting turning points in financial markets. Excluding World War II and the Arab oil embargo which caused a rationing of critical energy supplies, initial declines in share prices have on average taken just one month to reverse. See Table.

 

Market Performance

Source: Bloomberg. Citi Private Bank as of August 27th 2017

 

  • Looking back, the 12 US equity bear markets post World War II had coincided with 11 episodes of economic contraction. On this front, it is comforting to note that US leading indicators point to continued strength in the US economy.

 

  • The US ISM Manufacturing Index jumped to 58.8 in August, its strongest reading since 2011. Given the strength of the manufacturing index, Citi analysts believe that the US economy will likely create more manufacturing jobs going forward. The recent strength in manufacturing and durables orders also raises Citi's confidence that business investment will continue to improve.

 

  • Even Hurricane Harvey is only expected to slow down US Q3 GDP growth by 0.1%, despite the damage inflicted on lives and property. Notably, repairs and rebuilding are likely to provide a mild boost to growth in Q4 and Q1 2018. 

 

  • Hence, on balance, while equity market valuations may be somewhat stretched in the US, corrections are likely to be short lived as long as the economy and earnings hold up. This will also be supportive of overall investor sentiment.

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