The US Federal Reserve’s 19 June forecast for the US economy and statement on the tapering of its “QE” program has caused global market noise and panic.
The message that many investors missed was that the US Fed is unlikely to withdraw quantitative easing until there is a significant improvement in jobs growth – which is why the US Federal Reserve Chairman reiterated in a speech on 10 July that the US easy money policy is still necessary because the jobs market is not yet showing sufficient growth and inflation remains too low.
There is also no evidence behind the noise to suggest that the global economy is sinking.
Here are several reasons why.
1) The US Fed’s forecast of the economy which prompted the tapering panic is, according to investment expert Bill Gross, far too optimistic. “If 7% unemployment is tapering’s final port of call, we simply think that we’re much further away than the Fed’s compass would suggest. We argue for structural headwinds – demographic, globalization, and technology influences – that have had and will continue to have dampening effects on domestic and global growth.”
2) Inflation, according to Gross, is a non-issue. He states that the US Fed’s own statistics show inflation running close to a 1% pace. “The Fed has told us that they target, target 2% and for the next 1–2 years are willing to accept even 2.5% until they reverse engines”. Gross argues that 2%+ inflation is a long way off, and that inflation does not even seem to be even moving in that direction.
3) The US isn’t the only global market driver anymore. According to emerging markets investment expert Mark Mobius, policy and politics in other emerging markets like India, China, and Brazil can have dramatic influence on the global stage.
4) Did you know that Japan, which has the second largest market capitalisation behind the US, announced in April a US$1.4 trillion program of quantitative easing? This will double Japan’s money supply in a bid to jump start the Japanese economy and banish the deflation that has dogged the country for more than a decade.
We believe that the recent volatility is short term noise which is not driven by long term market fundamentals. Instead, it is the earnings capacity of companies that should prove the ultimate driver of long-term stock market performance.
So, where to from here?
Successful investors ignore the volatility and base their investment approach on long-term fundamentals, rather than trying to time the market. Overshooting in both directions tends to even out over time, and generally stock markets do eventually reflect long-term economic growth trends.
Successful investors also buy when others are selling and sell when others are buying. Of course, this often requires great mental discipline. Which is where having good well-structured financial advice comes in to keep you on track.
Like to know more?
Simply call (02 9262 6045) or email if you’d like to know more. We’d be happy to help.