Important labor market data were released in the US last week. The US economy created 943 thousand jobs in July, which was more than analysts' consensus estimate. Also from other global macroeconomic data, it seems that the current growth dynamics of the world economy is at its peak at the moment.
This favorable global macroeconomic picture has also been reflected in stock markets over the past week, as major stock indices have reached new all-time highs. The broadest global stock index, MSCI All Country World, posted a gain of 1.0% and probably the most watched stock index globally, the US stock index S&P 500, posted a gain of 0.9%, ending the week at a new record of 4437 points. Central European equities, which is our preferred region, also performed very well. The CECEEUR index recorded a gain of 2.0%.
Overall, global equity markets as a whole remain overvalued as my global valuation Z-Score reaches 2.0, which is still close to the all-time high. The average global equity valuation is thus currently around 2.0 standard deviations above the historical average, which is approximately at the level from the market peak in 2000. Therefore, I believe that equity returns will be rather below average in the next few years. The average annual equity returns, including dividends, over the next five to seven years on the basis of the broadest global stock index MSCI All Country World are unlikely to exceed 5%.
On the other hand, bonds did not perform well last week, as the broadest global bond index, Bloomberg Barclays Global Aggregate Bond, lost 0.5%, while the average global bond yield to maturity increased by 0.03 percentage point to 1.02%. In real inflation-adjusted terms, the average global bond yield to maturity remains deeply negative, currently at -3.3%. Negative real inflation-adjusted bond yields to maturity are referred to as the financial repression. The performance of corporate bond indices was around zero.
As for my outlook on bonds, they are currently expensive as well as equities. Therefore, I believe that bond returns will be below average over the next five to seven years compared to the historical trends.
Commodities didn't do well last week either. The S&P GSCI global commodity index declined by 3.4%. The price of the barrel of the North Sea Brent fell even by 7.4% to $ 71. Gold weakened by 2.9% to $ 1,760 per troy ounce.
US dollar strengthened last week. The DXY dollar index, which measures the dollar's performance against a basket of other major currencies, strengthened by 0.7%. Against euro, dollar strengthened by 0.9% to 1.176 USD/EUR. Koruna weakened against dollar by 0.3% to the level of 21.52 CZK/USD and on the contrary strengthened against euro by 0.4% to the level of 25.41 CZK/EUR.
Investment Strategist at Conseq Investment Management, a.s.