Mohamed El-Erian of PIMCO put out a great blog piece a few days ago, the gist of which was, to paraphrase:
– Major equity markets reacted negatively to the seemingly better-than-expected US Q3 GDP print, and twitter IPO on Thursday November 7th
– Major equity markets reacted positively to the better-than-expected October jobs report on Friday November 8th
– These two reactions can be reconciled by observing that some strengthening of economic data increases the likelihood of the Federal reserve bringing forward the “tapering” of its program of buying securities (which is market negative, in the short term), but that by reaching economic “escape velocity” – which I understand to mean a sufficiently high positive momentum of economic news – the equity market will actually be able to handle the inevitable “tapering” without a serious negative shock.
This is a similar line of thinking to a piece I wrote a couple of months ago, where I argued that a return to a market which is no longer driven by the Federal Reserve’s securities buying program, and more importantly by associated anticipation of said program, would be welcome news for long-term investors such as pension funds who have seen the performance of their portfolios and asset managers pushed both up and down by the effects of the various asset-buying programs.
To quote El-Erian :
Such an outcome would need to be solidly sustained in the months to come so that, at the macro-level, materially-stronger fundamentals validate and enhance current market prices while providing for a return to less experimental policies. In the meantime, look for intra-asset market differentiation to become a more pronounced component of investment strategies, including greater equity and corporate bond concentration on solid-balance sheet companies, front-end fixed income exposures, and emerging markets strong enough to resist the temptation to return to some pretty bad old habits, as well as more cautious assessments of liquidity risk.
Good News will be Good News (for markets) again.