Equities ended the second quarter well off their highs, with Federal Reserve chairman Ben Bernanke shouldering much of the blame. This could prove to be a buying opportunity if the world’s biggest economy shows it can strengthen without the use of stimulus.
Bernanke has indicated that the US Federal Reserve may reduce quantitative easing. Many strategists believe this is the main factor behind leading equity indices, such as the S&P 500, and Germany’s DAX, falling back from the record highs they hit in May. Britain’s FTSE 100 fell more than 12% from a 12-year high.
As one commentator put it, the market has almost come to prefer having the drug over being cured. But a cure is on its way, by whatever means. More than 6 million jobs have been created in the US in just over three years.
Strategists are confident that, one way or another, things are getting better. Pessimistic investors may be worrying unnecessarily. Other investors have already decided the panic was overdone.
The Fed is only talking in terms of reducing stimulus because it perceives there may be less need for it. As market watchers at the investment arm of UK insurer Legal & General said: “It is worth noting that the Fed assured investors that tapering would only occur under the appropriate employment and growth conditions, but this reassurance has largely been ignored by investors.”
Some of the attraction of equities may lie in the lack of an alternative home for investors’ cash. Bonds will look less desirable if their prices appear ready to fall in anticipation of the Fed scaling back bond purchases.
Returns from leaving your money on deposit are abysmal, and negative in real terms. This will boost appetite for risk. Other factors are also supporting equities. Company earnings continue to hit new highs and cash-rich companies are buying back shares.
Of course, pessimists are not short of ammunition in the form of problems in other big regions around the world. The US has long since ceased to be the only show in town.
The eurozone’s crisis is far from being resolved and it is not long since many analysts regarded a break-up of the single currency zone as inevitable. But this seems less likely now, with the markets convinced that the European Central Bank can take the necessary action in the bond markets to avert disaster.
China, the world’s second-biggest economy, is no longer at double-digit rates, but it’s not going to contract anytime soon either.
To be sure, equities remain among the riskier types of asset. Family offices may want to exercise caution and spread their risk over the whole asset class rather than succumb to the temptation to buy into specific sectors that look cheap, say mining, for example.
The ECB and Bank of England’s strong indications that interest rates will stay low has helped to buoy the markets and some investors may feel the best buying opportunities have gone, but there may still be a chance to buy on some dips.