In his latest Quarterly Economic Outlook, Neil Williams, Senior Economic Adviser to Hermes Investment Management, argues that the recent market moves are a useful reality check, but believes that markets may be fearing the wrong 'bear'.
The recent weakness of equity markets looks driven more by the drift-up in bond yields, US tightening expectations, and what they may mean for future growth, rather than any downturn in the economic data. A testament to recovering, rather than relapsing, economies.
The challenge now for markets questioning the ‘Goldilocks’ scenario of ever faster growth and ultra-low rates is to identify which of the ‘bear’ risks to fear.
Declines from peaks to troughs in equity markets are traditionally associated with macro shocks, and/or a toxic policy-mix. However, with policy rates still close to the ﬂoor, QE close at hand, and little effort on ﬁscal-deﬁcit cuts, policy can hardly be accused of being toxic.
Two feasible triggers could be an extension of the bond-yield rise since the US Fed started its ‘belt and braces’ tightening, and a slower China, but, these should be contained. Furthermore, central banks’ skin in the game suggests they cannot afford to take us off guard. This, more than in other growth recoveries, should limit the rise in bond yields.