America’s greatest bull market rages on against the dying light

The reasons to bet against the rally across risk assets are numerous, serious, and almost exactly what they were before this year’s blistering melt-up.And yet this raging bull won’t go gently. It’s braved death and doubts – and beaten both. Six months into 2019, the S&P 500 has returned 17%, marking the best first half in more than two decades. Europe’s benchmark has matched the feat. US investment grade corporate bonds are having their strongest year ever.Forget the longevity for a second and marvel at the sheer defiance. On Christmas Eve, the S&P 500 was seven points from a bear market, and a stream of Wall Street prognosticators shuffled forth to pronounce the last rites. Since then, the gauge hit a record twice.“Investors had very low conviction at the start of this year, but those who were brave enough to once again get into risk assets reaped rewards,” said Wouter Sturkenboom, chief investment strategist for EMEA & APAC at Northern Trust Asset Management. “It’s a good lesson for investors not to stay scared for too long.” Death isn’t the only thing this bull market defied. Net outflows for 2019 from US equity funds totalled $41bn through Wednesday, according to Bank of America, which cites EPFR Global data. Globally it was $138.5bn. European stocks bled $71bn.The cash exodus is understandable given the macro backdrop, another headwind seemingly ignored by equity prices. Citigroup’s global economic surprise index has been negative since April 2018. Disappointing US numbers have been a big part of that, with hard and soft data trending down together.“On the economic side, you don’t have any proof or any sign the situation has improved significantly,” said Francois Savary, chief investment officer at Prime Partners SA in Geneva. “It means that the valuation of equities is back to a level that justifies being a little more cautious.” For some, the resilience of stocks could be a signal the business cycle isn’t as sickly as it seems. For others, the divergence from fundamentals can be ascribed directly to the apparent willingness of central banks to defend growth.As Goldman Sachs Group strategists observed this week, markets “have shifted back to a ‘bad news is good news’ regime.” The bet is that policy makers will move to shore up the economy and either succeed or in the process add stimulus that spurs asset prices.Fears for the economy have stoked government bonds as investors fret slowing growth and rock-bottom inflation. Treasuries returned just over 5% in the first half as they piled in. In the process more of the yield curve inverted, and the world’s pool of negative debt swelled to a record.Yet as bonds screamed recession, stocks defied that, too.“They don’t seem to price-in the same scenario, and this raises some worries for the second half,” said Guillermo Hernandez Sampere, head of trading at asset manager MPPM EK. “We must expect more adjustments and warnings during the summer due to unsolved issues. I wouldn’t call the rally stupid, just fragile.”Perhaps a look at commodities can break the deadlock. So far in 2019 oil returned about 30%. A bullish sign for global demand? Not at all – prices are propped up by supply cuts. And while copper has gained less than 6%, industrial metals overall are flat. Raw materials are defying easy explanation. Barclays strategists Ajay Rajadhyaksha and Michael Gavin are among those unconcerned by the mixed signals given off by markets.They see no disconnect between ultra-low yields and resurgent stocks, saying it’s a readjustment of what investors believe the long-term neutral policy rates will be.“We expect risk assets to remain resilient as long as relative valuations strongly favour equities over bonds,” they wrote this week.In the credit market, the defiance was of expectations. The average yield on US investment grade corporate bonds has fallen to the lowest since 2017, while that of European companies sank to a record. A slew of Wall Street predictions for 2019 compiled by Bloomberg said spreads would widen.