If you have been working in financial markets for a couple of decades, then you may react as I do when certain phrases are used in financial reports.
The recent US jobs report (non-farm payrolls) inspired some notable commentators to use the phrase ‘Goldilocks recovery’, alluding to the fact that the data – like the fabled Goldilocks’ porridge – was not too hot, yet neither was it too cold.
Too hot for what though? This phrase has been used in the past to denote a period where economic growth is not too hot to cause inflation, while not being too cold to cause worries about an impending recession.
This environment would appear to be investing Nirvana, as stable economic growth should lead to better profitability and higher investment returns, without the worry of the authorities shocking markets with rising interest rates.
The Schroder Multi-Manager team has, for some time, thought the US had come out of recession and was moving towards a decent expansionary phase.
The market, though, had become concerned that the poor data emanating from the US over the past quarter may be the result of an underlying economic weakness, rather than the extreme weather conditions experienced during a particularly harsh winter.
The most recent jobs data appear to have removed these fears as job creation in the US appears to be on track, though participation rates remain unusually low so we are not out of the woods quite yet.
The other worry hanging over markets for the first quarter has been the tapering of quantitative easing (QE), which has now begun and is likely to continue until October. It is quite possible that the pick up in volatility experienced in the first quarter of 2014 is directly related to this, as markets try to decide whether this has been timed correctly or not.
If we are in a ‘Goldilocks recovery’ then it is entirely inappropriate to be operating with emergency levels of monetary policy, let alone huge dollops of QE as well, so in many ways the beginning of the taper should be welcomed.
The other more conventional monetary tool, zero interest rate policy, has kept interest rates low at the expense of savers. The Federal Reserve has indicated there might be a “considerable period of time” between QE ending and interest rates rising.
When pressed on this, Janet Yellen, the new chair at the Fed, defined the considerable period as six months – in other words, the first half of 2015, which is ahead of market consensus.
The excitement about the US recovery is palpable – indeed the S&P 500 index is at, or near to, all-time high levels. Riskier areas of the US equity market have been leading the way, notably biotechnology and technology companies – particularly those with no profits.
So although strategists may be worrying about whether or not the ideal economic conditions are in place for strong investment returns, market participants have already decided.
I wonder how long before we see the other three characters from the Goldilocks fable.
Marcus Brookes is head of the Schroder multi-Manager team
