Can Central Banks Help Push Stocks Higher?

Pole Vault

Investors may be feeling a bit of “déjà vu all over again,” to quote the recently departed Yogi Berra. As the fourth quarter kicks off, amid scarce evidence of global growth, equity investors are once again looking to central banks for largesse and monetary stimulus to help push stocks higher.

While stocks ended the third quarter with their worst performance since 2011, according to Bloomberg data, a renewed reliance on central banks was evident in last Friday’s sudden stock market turnaround. As I write in my new weekly commentary, “As Growth Slows, Markets Seek Comfort in Old Friends,” the Dow Jones Industrial Average swung from a 250-point loss to a 200-point gain on Friday after U.S. investors treated a weak jobs report as a sign the Federal Reserve (Fed) will hold off on raising interest rates, according to Bloomberg.

Investors in other countries are also following suit, similarly exhibiting this shift in the investment regime. European equities stand to benefit from a recent weak inflation point, which may prompt further quantitative easing by the European Central Bank. A similar pattern is evident in emerging markets such as India, where last week stocks benefited from an unexpected rate cut from its central bank.

Growing concerns over the health of the global economy are manifesting in several ways, as data accessible via Bloomberg show. A broad measure of financial stress, the Global Financial Stress Index, recently hit its highest level since the summer of 2012. In addition, with investor risk aversion climbing, so-called high-beta, momentum names that are more volatile continue to suffer. For example, at the lows last week, the Nasdaq Biotech Index was down nearly 30% from its July high, according to data accessible via Bloomberg.

How a global slowdown may impact the U.S. economy

Though I don’t believe a U.S. recession is on the horizon, it’s becoming clear that the U.S. isn’t immune to the global slowdown. Not only was the September jobs gain number roughly 50,000 below expectations, but the August payroll numbers were revised lower as well. In addition, hourly earnings were flat and the labor participation rate fell to its worst level since 1977.

Meanwhile evidence continues to suggest that the U.S. manufacturing sector is struggling under the weight of a strong dollar and feeble overseas demand. As a result, second-half growth is likely to be considerably slower than the nearly 4% we witnessed in the second quarter, and a more pessimistic outlook for the U.S. economy is pushing back expectations for a Fed hike and driving down short-term yields.

So what does this mean for investors going forward? As we have seen in recent years, in a world where the Fed keeps rates anchored at zero, stocks benefit, if only because they compare favorably to cash and negligible bond yields. Finally, in such an environment, some old themes, such as a preference for income-producing equities, come back into vogue as investors gird for an even longer spell of “low for long” rates.

Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock. He is a regular contributor to The Blog.

 

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