Don’t step in front of a freight train. Wise words, indeed, both in reality and when it comes to investing. Toward the end of the week last week, traders seemed to believe that there may be a coordinated policy freight train coming down the tracks. The result was the biggest two day rally in the S&P 500 this year.
What is this proverbial freight train? Let’s start with Mario Draghi, the President of the European Central Bank (ECB). He made a firm pledge, yet again, to do “whatever it takes” to save the Euro and halt the European debt crisis. Last week, he was given public support from leaders in Germany, France and Italy to “do what is needed.”
Of course, that has been said before. This week, however, he will be meeting with two financial heavyweights that have, so far, remained in the background. Mr. Draghi meets with U.S. Treasury Secretary Timothy Geithner today, and he is expected to meet with Bundesbank (i.e., the German Central Bank) President, Jens Weidman, before the ECB’s Governing Council meeting on August 2.
A skeptic may validly point out that meetings are only meetings while action is action. To be sure, much of this has been talked about before. What is different this time? Well, to start, most of the negotiations up to present have been between country leaders like Presidents, Chancellors and Prime Ministers. Now the “money people” who focus less on broad country policy and more on specific monetary and financial policy are becoming more involved.
Secondly, these meetings are all being scheduled in what seems like a rushed manner, right before a scheduled ECB Governing Council meeting. While markets may be getting ahead of themselves, speculation has risen that something is coming. Might the ECB finally start to buy Spanish and Italian debt to bring yields back down? We’ll have to wait and see.
Our own Federal Reserve will also be meeting this week, and speculation is high that another round of quantitative easing could be in the works. We don’t know, one way or another, what any of the world’s policy makers will do, but we will suggest the following: being on the wrong side of the world’s largest central banks when they engage in stimulative policy action certainly seems like stepping in front of a freight train.
The risks, and metaphorical freight trains, could go either way. If nothing is done, yet again, markets could give back much of what was gained last week. If, however, a meaningful solution is reached, investors may get more comfortable in owning risk assets, and because stocks look fairly cheap-especially in Europe and many emerging markets-there could be a fair amount of room to the upside.
If you have any questions, please call.
Evan S. Russell, CFP®, Stacy L. Rerick, CFP®, Ronald E. Wilkinson, CFP®