The US stock market rallied for a year, but mutual fund flows and other sentiment indicators suggested that many investors didn’t believe what they were seeing. In the second quarter, they showed more conviction — and became convinced that stocks should be avoided.
An attitude adjustment appeared to have arrived on May 6, when the Dow Jones industrial average fell about 1,000 points before a sharp recovery cut the loss near the day’s close. The immediate cause of the frightening move has not been determined, though there was speculation that a “fat finger” at an investment bank pressed the wrong button and sent a sell order that was much bigger than it was supposed to be.
Whatever caused the drop, the bounce that followed was short-lived. Stocks soon fell below the lowest point reached on May 6, apparently without any technological enhancement, and continued downward. The Standard & Poor’s 500-stock index lost 11.9 percent in the quarter, ending near an eight-month low.
A fat finger may or may not have been a factor in the decline. Fat fiscal deficits in Europe almost certainly did. Through much of the quarter, fears abounded that decades of profligacy by governments in Greece and elsewhere in southern Europe would lead to debt defaults. That scare sent the euro skidding against the US dollar and depressed stock markets in Europe and beyond.
A plan by the EU to allocate 750 billion euros (US$940 billion) to shore up finances in ailing governments provoked a huge rally in global markets, but again the gains were fleeting. Investors evidently concluded that the rescue program could be financed only with more borrowed money and that it included no real overhaul of government spending.
Greece has lived beyond its means for decades. All the EU plan would do, some investors apparently decided, was allow Greece to live beyond Germany’s and France’s means.
“Greece is not going to comply with the austerity conditions,” predicted Komal Sri-Kumar, chief global strategist at TCW Group. “The program is probably a waste of resources and only prolongs the agony. It’s like adding to the mortgage debt of a homeowner who is already deeply underwater.”
Plenty of homeowners are in such straits, of course, and few are likely to have found much relief in the second quarter. Various measures of the housing market’s health continued to erode with the expiration of a tax credit for homebuyers, which had provided some fragile support in previous months. In May, sales of new homes reached their lowest level since the government began compiling such data in 1963.
Housing is just one segment of the US economy where the recovery may be running out of steam. Job creation has failed to meet economists’ expectations in recent months.
The Conference Board’s widely followed gauge of consumer confidence tumbled last month, with particular weakness in its expectations for conditions six months down the road. And the growth rate of the economy itself in the first quarter, initially reported at an annual pace of 3.2 percent, was revised downward for a second time last month, to 2.7 percent.
Economies that may have been weakening — and stock markets that definitely were — resulted in a dreadful quarter for owners of just about every kind of stock mutual fund. Funds in Morningstar’s database that focus on Europe lost 14.1 percent, the worst showing of the firm’s 80-plus fund categories. Funds that invest in US stocks lost 10 percent, on average.
Only two categories of equity funds out of more than three dozen had a winning quarter. Bear-market specialists rose 7.3 percent and funds that hold miners of precious metals were up 10.6 percent.
Bond funds proved to be a safe if unspectacular alternative to stock funds. The average taxable one was up 1.5 percent in the period.
The signs of weakness on both sides of the Atlantic have led some investment advisers to consider the prospect of a relapse into recession for Europe and possibly the US economy. Sri-Kumar expects one for each, calling for “a double dip first in Europe and then the United States.”
His is still the minority view, but just the threat of a double dip could keep stocks subdued, some advisers say.
“What does it mean for the domestic stock market?” asked Michael Avery, chief investment officer at Waddell & Reed. “I’m afraid nothing good. I think we’re going to struggle for the remainder of the year.”
Raising the prospect of weakening consumer spending, he added, “that’s very deflationary and I don’t know the way out of that.”
Policymakers acted as though they knew the way out last year, via various stimulus programs, but concern about swelling fiscal deficits has limited the opportunity to do more of the same, Avery said.
Jeremy Grantham, chief investment strategist at GMO, raised the prospect of the US economy displaying “Japan-style muddling,” a reference to the high deficits and sluggish credit conditions that have kept Japanese growth very slow for 20 years.
“The real economy is running a little scared” in the US, Grantham said. “The money supply is not growing; loans are not increasing. What we’ve had are bailouts and income transfers.”
Running scared, maybe, but not running so badly — at least as Thyra Zerhusen, manager of the Aston/Optimum Mid Cap fund, sees it. In her recent talks with companies, she has heard reports of favorable conditions.
“Business is better than managements had expected,” she said. “I was surprised. Profitability in several companies is better than expected and that has gotten lost in the shuffle.”
However, she cautioned that it might be too early to tell whether the fragile state of the European economy will have an impact in the US.
In some ways, the general uncertainty about the economy and the markets may make investment decisions simpler. There isn’t much growth around, managers say, so buy it where you can find it. For Avery, that means a trip abroad.
“Investors are desperate to find a place to put their money that offers an above-average rate of real economic growth,” he said. “I would gravitate toward what everyone is running away from. The [US] dollar is a haven, so I’d go to gold. The US is a haven, so I’d go to what the world calls emerging markets — China, India, Asia in general. They’ll come through this relatively unscathed.”
Others are staying home. Morris Mark, president of Mark Asset Management in New York, is concentrating on financially strong US companies, which he said have “a terrific opportunity to grow their businesses for a number of years.”
He also likes multinational companies like Coca-Cola and Nike, which he calls “key franchise companies that sell to the world but are not disproportionately exposed to Europe.”
Strength, safety and global reach — while skipping Europe — are common themes among investment advisers. Zerhusen also favors high-quality US multinationals. In her view, they are “nimble, flexible, they’ve done their restructuring in the last two years and should come out of this well.”
Grantham similarly prefers “defensive multinationals” and finds that “global equities are not too bad if you take out the three-fourths of the S&P 500 that are not super-high-quality blue chips.”
He said that economies “are more resilient than they’re given credit for and that’s one powerful and good influence here.”
However, as he pondered the various risks to prosperity, he added that it was prudent to be “slightly underweight” in stocks and “hope like mad that everything works out.”
A few weeks ago in Kaohsiung, tech mogul turned political pundit Robert Tsao (曹興誠) joined Western Washington University professor Chen Shih-fen (陳時奮) for a public forum in support of Taiwan’s recall campaign. Kaohsiung, already the most Taiwanese independence-minded city in Taiwan, was not in need of a recall. So Chen took a different approach: He made the case that unification with China would be too expensive to work. The argument was unusual. Most of the time, we hear that Taiwan should remain free out of respect for democracy and self-determination, but cost? That is not part of the usual script, and
China has not been a top-tier issue for much of the second Trump administration. Instead, Trump has focused considerable energy on Ukraine, Israel, Iran, and defending America’s borders. At home, Trump has been busy passing an overhaul to America’s tax system, deporting unlawful immigrants, and targeting his political enemies. More recently, he has been consumed by the fallout of a political scandal involving his past relationship with a disgraced sex offender. When the administration has focused on China, there has not been a consistent throughline in its approach or its public statements. This lack of overarching narrative likely reflects a combination
Behind the gloating, the Chinese Nationalist Party (KMT) must be letting out a big sigh of relief. Its powerful party machine saved the day, but it took that much effort just to survive a challenge mounted by a humble group of active citizens, and in areas where the KMT is historically strong. On the other hand, the Democratic Progressive Party (DPP) must now realize how toxic a brand it has become to many voters. The campaigners’ amateurism is what made them feel valid and authentic, but when the DPP belatedly inserted itself into the campaign, it did more harm than good. The
For nearly eight decades, Taiwan has provided a home for, and shielded and nurtured, the Chinese Nationalist Party (KMT). After losing the Chinese Civil War in 1949, the KMT fled to Taiwan, bringing with it hundreds of thousands of soldiers, along with people who would go on to become public servants and educators. The party settled and prospered in Taiwan, and it developed and governed the nation. Taiwan gave the party a second chance. It was Taiwanese who rebuilt order from the ruins of war, through their own sweat and tears. It was Taiwanese who joined forces with democratic activists
RSS