The markets have been more unstable than usual as of late. But for Goldman Sachs (NYSE: GS), there is no cause for concern just yet.
Yes, U.S. Treasury yields have been rising, and speculation around the termination of the U.S. quantitative easing program has unnerved quite a few people. However, Goldman believes that there’s a healthy correlation between present domestic yields and European equities in particular.
“While there are certainly risks around QE (quantitative easing) being withdrawn we continue to view rising bond yields as relatively benign for European equities,” Goldman Sachs’ European research team said in a report released on Thursday.
“Indeed provided it is better growth that is driving yields upwards (which is what we expect) we would argue it is supportive. We find a positive relationship between real yields in the U.S. and European equities.”
Much of the latest uncertainty and market fidgeting has resulted from Bernanke’s latest Congressional testimony, wherein he raised the possibility that the U.S. Federal Reserve’s asset-buying program could be tapered off in the near future.
At the same time, however, Bernanke emphasized that this is far too early to even consider seriously doing it, and he offered assurance that the Fed would take very seriously the matter of easing the markets into a post-Q.E. period to avoid the inevitable market shock.
Nonetheless, it was enough to leave the markets reeling mildly. Even worse was the revelation that a significant faction within the Fed would consider pulling back on the stimulus program as early as June (yes, today is the end of May already!) provided the economy makes further gains.
The resulting minor chaos caused 10-year benchmark Treasury yields to head north of 2 percent; in fact, they’ve gone up 10 percent in the past week alone. Perhaps investors are thinking back to 1994, when an increase in Federal funds in the market resulted in the creation of a bond bubble. When that popped, European equities slid down 17 percent.
Goldman states, however, that the current rise is far slower and less dramatic, and moreover, equities today are better-secured against such domino effects.
Economic Growth Versus Fed Draw-Down
However, the economy has seemingly obliged by underperforming yet again, thereby boosting market confidence that the Fed stimulus is likely to continue for the foreseeable future.
As Reuters reports, the Standard & Poor 500 is likely to end May 3.6 percent higher, and the Dow and Nasdaq are both up 3.3 and 4.9 percent respectively. All of this is most likely because the latest unemployment numbers suggest that first-time claims for unemployment benefits ticked up rather than down.
Adding to the general economic woes, government numbers for Q1 GDP ended up lower than anticipated. Even the housing market numbers weren’t all too happy, despite recent talk of a homebuying resurgence. It was widely expected that pending home sales would go up 1.1 percent over April, but we saw a rise of just 0.3 percent instead.
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Meanwhile, high-dividend stocks aren’t the flavor of the day any longer, it seems. That, of course, is a natural consequence of the steady gains made by U.S. bond yields. With the 10-year Treasury yields at near-13-month highs, so-called “defensive” stocks are no longer all that attractive.
And as the Washington Post indicates, utilities are now down 9.2 percent for the month. Why, in short, should investors continue investing in the stock market? One can only push stocks so high before wondering, well, what’s next?
Thus far in 2013, the Dow is up 16.8 percent, the S&P 500 is up 15.6 percent, and the Fed’s latest words have had investors drawing back in anticipation of a market shock that’s soon to come.
So on the one hand there is the hope for economic growth (that’s great news), but on the other there’s the worry that that same economic growth would cause the Fed to end the stimulus program (that’s definitely not great news). After all, investors are acutely aware that a lot of the economic improvements we’ve seen thus far have ridden on the coattails of Bernanke’s quantitative easing program.
The obvious concern is whether the economy has reached the critical momentum threshold necessary to keep pushing ahead once the Fed removes its stabilizing influence. What do we make of Goldman’s sanguine outlook, then? They seem to be saying, in short, that it’s too early to worry.
One hopes they’re judging this better than some of their decisions in recent memory.
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