Well, another summer has come and gone and we trust that everyone enjoyed their summer barbecues spending time with friends and family alike. It always seems that they go by way too quickly.
The Capital markets have gotten back to work so to speak, now that Europe is no longer on holiday and half of New York is back on the job. As such the markets are behaving pretty much as expected. As the institutional traders and fund managers come back to work in September, they typically adjust their portfolios and we see some softness in the markets. Throw on top of that the history that October brings, and you have what we are seeing now.
There has been an accumulation of positive macro-economic data points over the course of the past few months providing the impetus the S&P 500 needed to top the 2000 level for the first time ever. Now while this appreciation is warranted, we are beginning to see valuation levels also creep higher, with the S&P 500 now trading at 16.8 times next years forecasted earnings. This should not be considered an expensive market yet however, as the long term historical norm is about 15 times earnings, and it is nowhere near the astronomical levels we saw in 2000 when the S&P 500 was trading at greater than 40 times earnings, or three times its historical norm.
So what is going to be the driver of the markets over the remaining course of the year? You will get a lot of different answers to this question, but we think it is going to be ‘good old’ Monetary Policy. With Mario Draghi, head of the European Central Bank (ECB) cutting overnight interest rates in the EU to 0.05% yesterday, Gary Pzego of Atlantic Trust in Boston said in a phone interview with Bloomberg that “the underlying direction of monetary policy in different parts of the world is shifting. That could be a source of volatility and uncertainty.”
Mario Draghi sees almost $1 Trillion stimulus as fresh aid for the moribound European economy, pledging to “significantly steer” the ECB’s balance sheet higher in a plan that also includes purchasing privately owned securities in an effort to revive inflation in the 18-nation Eurozone. With inflation in Europe a paltry 0.3% the ECB will desperately fight to avoid any stagnation in Gross Domestic Product.
In addition to the monetary easing, the ECB also announced a punitive rate of minus 0.2% for deposits held at the ECB in a move to further encourage companies and households to spend rather than save. The privately owned securities, which is essentially Asset Backed Securities and is designed to funnel money into their economy, is very similar to what the U.S. Federal Reserve did in their Mortgage buying program as part of their Quantitative Easing program. This program did work to re-inflate the U.S. economy, and it looks like Europe will be about 2 years behind in their recovery.
And just like there was a very good opportunity to add U.S. assets to a portfolio in 2010, we could see a very similar opportunity within Europe next year as this program begins to filter its way into the economy.
There will always be additional factors, such as the jobs data that we received this morning that was lighter than forecast, or continued geopolitical risks such as the current situation in Ukraine. That being said, we now feel that the primary longer term driver of the global capital markets will be Monetary Policy.
For those of you who are either riding or cheering on someone who is, this weekend in the RBC Vancouver to Whistler Gran Fondo, safe ride and good luck to all, including DHG partners Mark Hewett and Erik Dekker. If you’re heading up to Whistler, be mindful that the roads will be extremely busy for most of Saturday.
For those of you who would rather skip the ride and enjoy a burger, you’re in luck. In-N-Out Burger will be setting up shop in Langley on Sunday for the annual Langley Good Times Cruise-in for charity. Last year over 1,500 burgers were served at the event. So, while there won’t be an In-N-Out Burger location in Vancouver anytime soon, you can get your fix close to home this weekend.
Thank you for your trust.
As always, we welcome any feedback. Have a great long weekend.
The Dekker Hewett Group