Investors fretting about the possibility of a big reversal in global stock markets may just want to borrow a slogan from the British – and just keep calm and carry on.
It won’t be easy given the background noise. Fears of a Russian invasion of Ukraine on top of deepening chaos in the Middle East, and the bailout of a Portuguese bank, are all fueling the pessimism. Add in expectations the U.S. Federal Reserve will raise interest rates next year for the first time since 2006, and concerns that the U.S. stock market has gone too long without a correction, and it isn’t surprising to see the glass half-empty crowd emerging from a long hibernation.
But some top investors and strategists in the U.S. and Europe say that there is little reason for alarm given the U.S. economy is picking up steam, rates are widely seen staying at low levels for several more years, and second-quarter earnings growth in both the U.S. and Europe is looking healthy.
Traditional measures that signal worry – such as the slope of the U.S. yield curve – are still supportive for markets. And U.S. equity funds have seen outflows in eight of the last 10 weeks when exchange traded funds are excluded, supporting the notion that investors remain fearful, and not displaying the kind of euphoria that acts as a precursor to big pullbacks.
“I don’t think that the fundamental underpinnings to this bull market have been derailed or dented in any significant way,” said Steven Einhorn, vice chairman of $10.5 billion hedge fund Omega Advisors Inc.
In recent weeks, markets have been far from panic stricken despite all the talk of a correction.
While there have been pockets of weakness, particularly in Europe, one key gauge of global stock averages has dipped just 3.6 percent from its recent high a month ago.
Another big reason for optimism is that there are very few alternatives to equities if investors want to chase anything like a decent return on their capital.