Market snapshot: risks skewed to the upside

Plenty of factors are influencing stock direction currently, but the optimists are in the ascendancy.

As the first quarter comes to a close, markets remain on the front foot with perpetually conflicting elements generally skewed to the upside.

Increasingly successful vaccine rollouts, fiscal stimulus packages and signs of nascent economic recoveries have all contributed, despite those very factors also raising concerns of inflation and a subsequent rise in interest rates rather earlier than expected.

According to the most recent survey, US consumer confidence hit its highest level for a year based on the improving employment situation and, in particular, a wave of optimism following the substantial $1.9 trillion injection from the American Rescue Plan. With consumer spending estimated to account for almost 70% of economic activity, and with the pandemic shackles likely to be loosened over the coming months, estimates for economic growth this year are vibrant and increasing.

In the year to date, a summary of this generally optimistic sentiment, and the rotation out of high growth stocks into more traditional cyclical sectors, is reflected by the performance of the three main indices. The Dow Jones has risen by 8%, the S&P 500 by 5.4%, while the Nasdaq has been a relative laggard in adding 1.2%.

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The expected release of pent-up demand has also been to the benefit of the oil price, which is ahead by 25% in 2021. This offsets most but not all of the damage suffered last year, with the brittle balance between supply and demand being managed carefully as far as possible by the oil producing consortia.

In the UK, market sentiment has also been progressive, with some idiosyncratic factors in play. The speed and scope of the vaccine rollout to date has been one of the most successful to be found anywhere, with sterling generally holding its own on improved economic prospects.

Meanwhile, the attraction of the UK as an investment destination has increased both on valuation grounds, while the FTSE100 largely represents an index which should benefit from a cyclical move towards recovery stocks. At the same time, its lure as one of the more generous dividend yielding indices is slowly being restored as companies progressively return to ramping up shareholder payouts.

The index is ahead by 4.7% in the year to date, and the increasing international scrutiny of some potentially undervalued names could bode well for prospects as the challenges of the past year unravel.