Market Comment (late) 25 January 2012

Markets improved last night, after several days of low activity caused by ongoing uncertainty about when Greek debt will be written down. The driver that moved markets was the interest rate setting meeting of the US Federal Reserve. At it’s meeting, the Fed did not change interest rates, but it did expand its promise to keep interest rates low for a long time. This move is stimulatory to the US and global economy, and so to risky assets (primarily equities).

Importantly, yesterday’s announcement by the Fed combines with the December liquidity program of the European Central Bank, and the likely February boost to Quantitative Easing in the UK. The developed world’s central banks are fully engaged in stimulating growth, which greatly increases the probability that equity markets will continue to inflate over the coming months.

This is not 2009, prices will not rally so much, nor so easily. We should recall that the Fed’s announcement to keep rates low until late 2014 was already essentially priced into bond markets. That being the case, the immediate impact on all risky assets is less than we might otherwise have witnessed (the dollar weakened but only slightly).

Other US news that we have been watching this week has been corporate earnings, and at the end of the week we will see the US 4Q11 GDP number. That statistic is likely to be disappointing, given how aggressively the Fed has acted today. Earnings have been mixed, less companies have impressed us than usual so far this earnings season. However, Apple’s amazing results, issued on Tuesday, should be a support for the whole technology sector.

Over in Europe, the news on the crucial Greek debt restructuring is slow, the two sides continue to edge toward an agreement, but the process is painfully slow and each day it takes causes more nervousness. We expect negotiations to end in the next week or two, when they do, equity markets will move quickly higher around the world. But before this happens, many investors remain cautious, and failure to reach agreement will cause a sharp sell-off.

It would do all investors well to remember the difficulty they feel about deciding on investments today. Equities are not at their lows, the US market is even near its recent highs. Given the dangers going on – European crisis, weak growth in the US, etc. – the risks investors face are high. If markets continue to rise, as we currently expect them to, then we will look back at this period and talk about what an easy opportunity it was. Making the decision to invest today is less easy.

Ways to invest with controlled risk include: selling put options, which pay bonuses instead of giving automatic equity market exposure; buying dividend paying stocks, which may rally less than highly cyclical companies, but offer less downside risk and pay impressive yields; using stop-losses. In these kinds of markets, it is important to be ready to change your investment stance quickly.