As the second quarter of 2013 slips into history, investors are finding a few bumps in the road. The tectonic plates of the world economy are shifting. The yield on the benchmark 10-year Treasury is moving up as we hear hints from the Federal Reserve that there may be an end to QE (Quantitative Easing) 3, but not yet.
The assumptions behind the recovery of global markets has been based on the assumption that the US Fed would keep printing money, China would keep growing and Japan would stay mired in a decades-long slump. Any hints that these assumptions would change have triggered sudden gyrations.
The Fed’s hints that QE-Infinity will not go on forever has some people worried. There is also a question of how fast the Chinese economy is really growing. And Japan has suddenly embarked on its own QE program. Currency markets are jittery, and currencies have a significant impact on investors in foreign securities.
What’s ahead for the rest of the year? Answering this question now is impossible.
The prospect for slower growth in China is pulling commodity prices down. Japan’s stock and bond markets have been riding a roller coaster as attitudes shift almost daily about the new government’s economic policy. Emerging market currencies are also in decline. India, Poland, South Africa and Brazil are trying to prop up their currency. Meanwhile Europe remains mired in recession.
Economists at J.P. Morgan Chase have turned mildly hopeful lately that the U.S., Europe and much of the rest of world economy will shift into a higher gear later this year, in what would be a pleasant contrast to the midyear slumps seen in recent years.
The International Monetary Fund is more cautious about the rest of the world. Managing Director Christine Lagarde said “We could be entering a softer patch.”
Whatever comes our way, we are, as always, positioning our portfolios to participate in further market gains and to cushion any market declines. Over the long term the trend is up.