Global stocks rallied by 12% in the first quarter in local currency terms, the best start to a year since 1991. Bonds rallied alongside stocks and the US 3-month/10-year yield curve inverted for the first time since 2007. This left investors facing conflicting signals. Equities, commodities and credit have moved to price a more benign economic scenario, in which more accommodative central bank policy and lower bond yields help extend the business cycle and prolong the rally in risk. In contrast the decline in bond yields and the inversion of the US yield curve appear to be reflecting growth fears.

But the first day of the second quarter offered signs that the benign scenario might be gaining the upper hand. The S&P 500 rallied 1.2%, 10-year bond yields rose 10 bps and the 3-month/10-year yield curve steepened by 10 bps and is no longer inverted. We see a number of factors driving the move:

* Signs that growth may be bottoming out. Chinese manufacturing PMI data rebounded by more than expected in March, with both the private and official gauges moving back into expansionary territory. The US ISM manufacturing index also beat expectations, with the sub-indexes showing strength in production, new orders and employment.

* More positive US-China trade talk signals. US Treasury Secretary Steve Mnuchin has described the ongoing talks as productive, and China has offered new concessions. It announced it will list Fentanyl and all related substances as controlled narcotics, has extended the suspension of more tariffs on US vehicles and auto parts, and will make further US soybean purchases.

* Fears of an earnings recession may be overdone. According to Bloomberg, the pace of analyst earnings downgrades is lessening, while estimates for sales growth are being raised ahead of this month’s US corporate earnings season. We still expect earnings growth of 4%-5% this year. We remain moderately risk-on in our tactical asset allocation. We would like to see more confirmation that growth has stabilized before we increase risk. Against this backdrop we recommend reviewing your financial plan, ensuring diversification, hedging downside risk and remaining flexible, as well as tapping in to enduring trends, like sustainable investing. Read more in our report 1Q 2019 review: Rally Redux.