The Short View: Stock markets remain buoyant
The Short View: Stock markets remain buoyant
By Philip Coggan, Investment Editor
Published: April 26 2006 18:04 | Last updated: April 26 2006 18:04. Copyright by The Financial Times
Global stock markets seem remarkably resilient. Investors have shrugged off a combination of rising bond yields, higher precious metals prices, geopolitical worries pushing up the oil price and the prospect of tighter monetary policy (in the eurozone and Japan at least).
In the past, this kind of climate has normally caused problems for equities. “Since the 1960s, when the 10-year Treasury yield, the 3-month Treasury bill yield, and the consumer confidence index have all been rising, the S&P 500 index has followed by under-performing risk-free Treasury bill yields by 5.13 per cent annualised, on average,” says John Hussman, president of the Hussman Investment Trust.
“But it gets worse,” Mr Hussman adds. “If we look at periods since 1975 when the Philadelphia Gold & Silver Index was also above its level of 6 months earlier, it turns out that the S&P 500 has followed with annualised losses of 12.37 per cent on an absolute basis (nearly a 20 percentage point shortfall versus risk-free Treasury bill yields). All four conditions are true today.”
Why is the stock market holding up so well? The previous cycles described by Mr Hussman have seen rising inflationary pressures (signalled by higher bond yields and metals prices) lead to higher interest rates, and thus an eventual economic slowdown. This time round, the US Federal Reserve is indicating that US interest rates are close to their peak and core inflation numbers seem to suggest that higher commodity prices are not working their way through the economy.
At least, that is the story equity investors seem to believe. Bond investors seem to be less sure that inflation is not a threat, with US 10-year Treasury bond yields hitting a four-year peak of 5.13 per cent on Wednesday while the yield on the 10-year German bund passed 4 per cent on Tuesday for the first time in 18 months.
Jim Paulsen, chief investment strategist at Wells Capital Management, says rising Treasury bond yields have historically not been a problem for the US stock market until yields have reached 6 per cent. He argues that until yields reach that tipping point, equity investors can afford to be relaxed about the bond market.
philip.coggan@ft.com
By Philip Coggan, Investment Editor
Published: April 26 2006 18:04 | Last updated: April 26 2006 18:04. Copyright by The Financial Times
Global stock markets seem remarkably resilient. Investors have shrugged off a combination of rising bond yields, higher precious metals prices, geopolitical worries pushing up the oil price and the prospect of tighter monetary policy (in the eurozone and Japan at least).
In the past, this kind of climate has normally caused problems for equities. “Since the 1960s, when the 10-year Treasury yield, the 3-month Treasury bill yield, and the consumer confidence index have all been rising, the S&P 500 index has followed by under-performing risk-free Treasury bill yields by 5.13 per cent annualised, on average,” says John Hussman, president of the Hussman Investment Trust.
“But it gets worse,” Mr Hussman adds. “If we look at periods since 1975 when the Philadelphia Gold & Silver Index was also above its level of 6 months earlier, it turns out that the S&P 500 has followed with annualised losses of 12.37 per cent on an absolute basis (nearly a 20 percentage point shortfall versus risk-free Treasury bill yields). All four conditions are true today.”
Why is the stock market holding up so well? The previous cycles described by Mr Hussman have seen rising inflationary pressures (signalled by higher bond yields and metals prices) lead to higher interest rates, and thus an eventual economic slowdown. This time round, the US Federal Reserve is indicating that US interest rates are close to their peak and core inflation numbers seem to suggest that higher commodity prices are not working their way through the economy.
At least, that is the story equity investors seem to believe. Bond investors seem to be less sure that inflation is not a threat, with US 10-year Treasury bond yields hitting a four-year peak of 5.13 per cent on Wednesday while the yield on the 10-year German bund passed 4 per cent on Tuesday for the first time in 18 months.
Jim Paulsen, chief investment strategist at Wells Capital Management, says rising Treasury bond yields have historically not been a problem for the US stock market until yields have reached 6 per cent. He argues that until yields reach that tipping point, equity investors can afford to be relaxed about the bond market.
philip.coggan@ft.com
posted by Carlos T Mock at 4:21 PM
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