Monday, 2 March 2015

Risk appetite returns but is it enough to sustain the bull market?

Risk appetite among investors rose in February.

Stocks rallied last month, bringing the bull market closer to its sixth anniversary. The MSCI All-Country World Index jumped 5.5 percent, its best monthly performance in three years, and set a new intraday record on Thursday in the process.

The Standard & Poor’s 500 Index rose 5.6 percent for its best month since October 2011. The Stoxx Europe 600 Index surged 6.9 percent. The MSCI Asia-Pacific Index rose 4.2 percent.

In the bond market, United States Treasuries, a safe haven among global investors, fell in February, pushing the 10-year yield up 37 basis points to just over 2 percent.

However, junk bonds rose in February, with the SPDR Barclays High-Yield Bond ETF gaining 2.1 percent, its biggest increase since June 2012.

In Europe, government bonds rose ahead of the European Central Bank’s planned purchases as part of its quantitative easing programme. Switzerland’s 10-year rate went below zero, as did the two-year yields for ten countries including Germany, France, Slovakia and the Nordic countries.

The move by the ECB almost certainly whetted investors’ risk appetite. And more central bank monetary stimulus is already on the way.

On Saturday, the People’s Bank of China announced on Saturday that the one-year deposit rate and the one-year lending rate will be lowered by 25 basis points to 2.5 percent and 5.35 percent respectively on 1 March.

Despite the recent improvement in risk appetite and continuing monetary stimulus, fund manager John Hussman remains unimpressed.

In his latest commentary, Hussman wrote that “our measures of market internals and credit spreads, despite moderate improvement in recent weeks, continue to suggest a shift toward risk-aversion among investors.”

“On a wide range of historically reliable measures,” he wrote, “we estimate current valuations to be fully 118% above levels associated with historically normal subsequent returns in stocks.” He added: “We do not have indications from market action and credit spreads that these extremes are likely to be tolerated for long.”

Hussman is also not assured by the prospect of further monetary easing. He wrote in his commentary that historically, easing by the Federal Reserve in an environment of risk-aversion did not stop the stock market from declining.

He noted that the Fed began cutting interest rates on 11 February 1930, nearly two and a half years before the market bottomed. The Fed began cutting rates on 3 January 2001 but the bear market continued for almost another two years. And in 2007, the Fed cut the federal funds rate on 18 September, even before the market peaked, and kept cutting as the market turned down and kept falling.

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