The world’s central banks, led by the Federal Reserve, have done a spectacular job of bullet-proofing asset markets.
Yesterday was the first session in eight that global stock markets had fallen. We have governments tumbling in Europe, revolution in the Middle East, and disaster in Japan – still the world’s third-biggest economy, though it’s easy to forget.
But for today’s investors, every fresh nasty surprise is just another buying opportunity. And no wonder.
First we had the ‘Greenspan put’, where Alan Greenspan would slash interest rates at the first sign of trouble.
Now we have the ‘Bernanke print’, where everyone relies on his successor Ben Bernanke to reach for quantitative easing (QE) if things look like going wrong.
But what happens if QE ends?
Three big worries for financial markets
Broadly speaking, there are three big obvious worries for the markets right now. There’s the disaster in Japan. There’s the turmoil in the Middle East. And there are the problems in the eurozone.
When it comes to nasty surprises, what bothers markets more than anything else is uncertainty as to their extent. Investors can quickly discount a grim situation as long as they know that it won’t get any worse. In Japan’s case, the key remaining uncertainty for now seems to be the nuclear situation. It’s not easy to get sober analysis of this. But reading around, it still looks to me as though the impact will be localised.
In any case, foreign investors aren’t worried. They’re in a ‘buy first, ask questions later’ sort of mood. Overseas investors bought a record £7bn of Japanese stocks last week, reports the Evening Standard. We’ve been fans of Japan for a long time, so it’s nice to see others coming round to our view point. But I can’t help but feel that this sudden enthusiasm smacks of a desperate hunt for buying opportunities rather than reasoned decision-making.
What of the Middle East? Well, as long as Saudi Arabia can continue to act as the ‘central banker for oil’, as Fatih Birol of the International Energy Agency has described it, investors can take spreading turmoil in other countries on the chin. That’s not to say that things couldn’t deteriorate. It’s a volatile region after all.
For now, between Portugal’s problems, the Irish banking sector, and the exposure of the rest of the region’s banks to all this, Europe is the biggest source of uncertainty. Politicians in the eurozone still can’t get it together to agree a proper bail-out deal. And I’m not sure why that continues to surprise people.
Much as I often criticise politicians, it’s unfair to knock Europe’s leaders for being unable to put the interests of the eurozone ahead of national interests. German voters, not Irish, Greek or French ones, vote for German leaders, after all. It’s asking the impossible to expect eurozone leaders to easily reconcile the ‘greater good’ with the wishes of the people who actually put them in power.
As my colleague David Stevenson pointed out on Friday, it all means a rocky ride for the euro. If you’re interested in trading that, you might want to sign up for our free MoneyWeek Trader email to get general tips and tactics for successful spread betting.
The end of money printing
But the biggest threat to financial markets in general has little to do with these three danger zones. Unlike Japan or the Middle East, there are no lives at stake. And unlike Europe, the political drama and voter anger will be muted and low-key.
I’m talking of course, about the end of QE. Judging by the comments of the fund managers at our most recent MoneyWeek magazine Roundtable (which subscribers can read here: Eleven stocks to buy in choppy markets – and if you’re not already a subscriber, subscribe to MoneyWeek magazine.), investors are expecting QE3 to come along fairly promptly after QE2 ends in June.
But it might not be a sure thing. Support for another batch of QE isn’t uniform – Richard Fisher, the head of the Dallas Federal Reserve, has argued that the real question is when to begin tightening. And just as is happening here, higher food and oil prices are pushing up inflation expectations in the US too.
It’s also interesting that the Fed is to start holding quarterly news conferences, with the first one happening on 27 April. To me, that suggests that Bernanke is keen to start fine-tuning expectations. Certainly, it should give some clarity on what the Fed is planning to do.
What does it mean for investors? Well, if the main thing keeping markets up has indeed been QE, then over the next three months, stocks could start getting wobbly if investors start to believe that QE3 isn’t a done deal. More importantly, second-guessing central banks isn’t a sensible way to invest for the long term.
We favour a value investing approach. And one key tenet of that, as behavioural economist James Montier noted in a recent piece, is patience. In other words, if there’s nothing worth buying then don’t. For now, based on historical levels, with the S&P 500 on a cyclically adjusted p/e of around 23 times, the US stock market looks expensive.
So what is worth buying? Our own Simon Caufield has been writing about his approach to value investing for the past couple of weeks in Money Morning. Simon has also put together some free reports on his approach. If you missed yesterday’s, you can view it here:
. And next Monday, Simon will be highlighting a stock that fulfils all three of his criteria for successful investing.
Our recommended article for today
The letter George Osborne should really send Mervyn King
Every three months Mervyn King writes to the Chancellor of the Exchequer to say why he missed his inflation target. The Chancellor always accepts the excuses. But next time, George Osborne should write a proper reply, says Matthew Lynn. Here’s what it should say.