Contrary to popular belief that the economy would rebound in 2014, the opposite has occurred. Bond yields have tumbled when they were supposed to rise steadily, and as of 11 August 2014, stocks had not seen meaningful appreciation and were instead fractionally down for the year.
What’s Inside?
Both domestic and international stocks have defied the expected single-digit increase and struggled in the first seven months of 2014. The yield on the benchmark US Treasury has likewise challenged market expectations by falling from 3.03% at the end of 2013 to 2.42% as of 11 August 2014. Economic doldrums are largely to blame, along with stocks that seemed to be valued to perfection after the meteoric 30% rise in 2013. Regarding GDP, the negative US growth in the second quarter, with output falling 2.1% and disappointing data from Europe and Japan, caused market analysts to question the assumption that normal growth had returned to the global economy.
How Is This Article Useful to Practitioners?
Despite the setbacks, the global stock markets remain near all-time highs. The author delves into the reasons for this conundrum, targeting central bank policy, the lack of attractive alternatives to stocks, and corporate profitability. From a central bank perspective, the increased liquidity in the global economy as a result of quantitative easing has created a floor for equity prices. From an attractiveness standpoint, stocks are preferred by many long-term investors given the low yields on bonds and the recent underperformance of alternative investments. Finally, corporate profits have nearly reached the all-time peak set in 2007, which suggests that corporations are making the most of the economic situation to cut costs and boost revenues.
Abstractor’s Viewpoint
The author provides a cogent, timely review of current market conditions and relevant global factors affecting the stock and bond markets.