IFS MARKET COMMENTARY
Equity markets have rallied sharply since early July, during what is usually a quiet time of year (whatever happened to “sell in May and go away”?), encouraged by a better than expected earnings on both sides of the Atlantic and by signs that most developed economies were emerging from recession. The rallies continued to be confined mostly to the "up and down" sectors which had both plunged and bounced fastest in the past year, financials, mining stocks and industrials. More recently, however some of the more defensive sectors have also joined the party.
Central banks have been at pains to say that monetary policy will not be tightened prematurely, which, given their role as guardians against inflation, underlines the strong desire to avoid repeating last winter's brush with the risk of a full blown economic depression. They have also emphasised the many risks to the recovery. These include too much personal debt, too little bank capital and too much public borrowing.
Financial Advice from Independent Financial Advisers - The IFS Group
Central bankers clearly believe that domestic inflation pressures will remain contained by the spare capacity created by the recession. It is less certain whether the same applies for imported inflation, since commodity prices may be more sensitive to the rapid growth rates in emerging economies and therefore accelerate before growth is buoyant in developed economies. There could come a time when inflation from this source forces tighter policy in developed economies while they still have spare capacity, one of the downsides of globalization.
Although there are risks to the steepness and persistency of the recovery, central bankers appear set to continue to fund the overall strategy until it is clear that the recovery in confidence is sustainable.
Given that there is still a significant lack of certainty over the outlook, it is fair to ask if equity markets are too easy-going in their “everything back to normal” approach.
At the very least, greater care will be needed, now that the bargain basement prices have all been mopped up.
Financial Advice from Independent Financial Advisers - The IFS Group