The past few weeks have seen markets react to apparently even the slightest hint that their current stimulant of choice might just start to be restricted in its supply in the USA. The Quantitative Easing (QE) programme has certainly been a catalyst to push more money into the equity markets and has provided a level of confidence that was definitely missing just three years ago. However, the market fears that any sudden withdrawal would erode all of this swiftly and we could return to those fretful and volatile markets of that period.
Some have blamed certain central bankers for indiscreet comments, but in fact is Mr Bernanke not just providing us with logical warnings that at some stage access to this drug will be stopped? We will move from financial highs to market cold turkey. The question is therefore – will the economy in the US continue to grow, such that the need for the QE drug is no longer needed and that its withdrawal (whilst removing a support) will not be dangerous? In effect we are being softened up for a decision which will come but as yet nobody knows when. So tremors before the quake might teach the market to get used to the idea that the end of QE is inevitable – but not quite yet.
Perversely, our market rally has been led by, seemingly, the wrong sectors. In times of nerves, investors rush to the relative safety of the defensive stocks, those old reliable friends that will always be needed by consumers even in the darkest hours. So the utilities and supermarkets are friends for the fearful and will continue to proffer dividends when prices are low.
So how come that this time it has been the defensives that have led the way and the cyclical stocks (which should be those leading a recovery) have been left way behind? In fact, a quick look at the sector valuations and it becomes apparent that the drives for yields from these old reliables have driven valuations out of proportion from the industrials and their chums. Time then for a re-assessment of these as we move into the next stage of the cycle.
So Sir Mervyn King has chaired his last MPC meeting and, after some encouraging economic news from the UK, maybe he can step down knowing that whilst the job isn’t finished (and of course it never will be) there are at least some positive signs that some confidence is returning to parts of the UK economy.
The Purchasing Managers Index is often a reliable indicator as it looks forward at purchasing intentions. Along with the construction figures improving somewhat unexpectedly, this provided a pair of positive notes for the economy. Add to that an improvement of sentiment in the services sector and we are seeing enough dots to draw a line in a positive direction.