Remember the big market collapse of the early weeks of the year, the talk of Chinese economic meltdown and the peril facing the euro zone? It was the worst period for equity markets in years, and there were fears that a big fall was on the way in share prices before things might stabilise.
But the crisis seems to have passed, for the moment anyway, and equity markets have headed sharply higher since mid-February, with the S&P 500 adding an extraordinary 12 per cent . US markets have now recouped all their 2016 losses and stand roughly unchanged from their levels at the start of the year.
It would be a brave forecaster who would call it from here, with concerns remaining about bubble valuations and an extraordinary period of low interest rates.
Yet some of the worst fears seem to have eased. Growth still seems to be evident in the US, the Chinese economy is slowing but has not collapsed, and, believe it or not, oil prices have risen. Even emerging market currencies, hit with a terrible squeeze early in the year, have recovered. Investors are again putting money into funds based on these currencies or emerging market stock exchanges.
Yesterday equities seemed to pause for breath. Some analysts expect that there could be some profit-taking after the gains of recent weeks, particularly in an environment where returns are so hard to get.
For the moment, expectations that the US Federal Reserve could ease off on its rate hike plans and that other cental banks could “do more” if needed also seem to be supporting the mood. A weaker dollar has also been a key part of the picture.
Smarter heads in the markets urge caution, though not necessarily pessimism. Central bank action may be supporting the markets, and may continue to do so, but central banks are doing this because growth is so weak. And slow growth hits corporate profits and share prices sooner or later.
Who knows where the ups and downs will take us, but there seem to be more than enough potential flashpoints in the world economy and the markets to test investors’ nerves. With interest rates at zero, investing is a nerve-racking exercise.
