A market montage

A market montage

Posted on 24 April 2015

"...central banks have done little to create jobs, ameliorate income inequality, or cure dandruff..."

There is an old adage that opinions make markets. Anyone who has spent time committing capital would agree that the more diverse the set of opinions on a topic, the richer the opportunity to profit. In the US conflicting narratives on the health of first quarter earnings and more fundamentally the economy, is undoubtedly a catalyst for anaemic returns for large capitalisation US equities. Viewed through the prism of the transport sector’s performance, a durable economic slowdown is a near certainty. Belying this line of thinking is the strong performance of smaller, domestically focused companies.

Oddly, against the backdrop of diverging returns, not only within the US market but relative to other markets especially Europe and the UK, views about economic vitality and questions about central bank policy and efficacy, volatility has been remarkably quiescent.  It strikes one as a picture of complacency borne of certainty which is not what a read of market chatter confirms. Or does it? In the euro zone, the European Central Bank affirmed its quantitative easing program during its meeting last week, lying to rest musings about an early end to the effort given the response of the bloc’s equity market and a clutch of economic data. In the United States, investors appear unanimous in their view that the Federal Reserve will postpone changes to interest rates until later in the year.  In the Age of Central Banks, views about monetary policy are important.

While the vast sums of money summoned forth by central banks have done little to create jobs, ameliorate income inequality, or cure dandruff, it has created an exquisite rise in asset prices of all flavours from art to real estate. A change in policy suggests a change in prices. We have highlighted this repeatedly because it is worth repeating. An economy in which money has a price is very different from one that doesn’t.

Hans Olsen, CFA Global Head of Investment Strategy

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