CAPTRUST Chief Investment Officer
Asset classes continue to take their direction from global central banks and policy makers as 2012’s third quarter delivers mostly higher asset price returns.
Last quarter we dubbed the investment landscape the “Kick-Save Capital Markets,” reflected in June’s final trading day when asset prices ascended higher thanks to a much-anticipated European summit. That conference concluded with markets cheering political leaders’ solidarity commitment despite scant details on how the European Union would affect change. Riskier asset classes raced higher, tempering an otherwise tough three-month investment period. That momentum carried into the summer, culminating in a strong third quarter investment environment with global stocks, commodities, and bonds mostly gaining from where they closed in June.
In late July, as the aforementioned conference’s influence started to dwindle, European Central Bank (ECB) President Mario Draghi addressed a London investment gathering and underscored his resolve: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”1 Six weeks later, Draghi introduced a program designed to provide troubled sovereigns with unlimited bond buying support in exchange for adopting more stringent budgetary restraint. Investors again cheered this salvo, particularly the open-ended nature of the ECB’s commitment.
Not to be outdone, the U.S. Federal Reserve responded the next week, committing to open-ended bond purchases in an attempt to improve the unemployment picture and further incentivize lending. The Fed voted to purchase $40 billion in mortgage bonds per month until they were satisfied with the labor market and further signaled that they would keep short-term interest rates low through 2015, a year later than targeted in previous communiqués. Markets responded again by driving up asset prices immediately following the Fed’s announcement, and inflation expectations also ramped higher.
Looking forward, the fourth quarter will cap off a year where seven G-20 countries had or will have presidential elections. All eyes are focused on the U.S. election season (presidential, congressional, and gubernatorial) as well as the pending Chinese leadership change, which happens once a decade. These events occur upon a backdrop of slowing global growth, plateauing company revenue growth (as measured by the S&P 500 and MSCI World Indices) and uncertainty about how countries will handle burgeoning debt loads. Clarity on fiscal issues, tax rates, and healthcare could provide riskier asset classes a further boost, but investors may choose to see what song the band will play next before making asset allocation decisions in a headline-driven, reactionary capital market context.
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