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Where Can Markets Seek Comfort as Growth Slows?

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As the fourth quarter kicks off, investors are once again hoping monetary policy will help push stocks higher.

Investors may be feeling a bit of “déjà vu all over again,” to quote the recently departed Yogi Berra. As the fourth quarter kicks off, amid scarce evidence of global growth, equity investors are once again looking to central banks for largesse and monetary stimulus to help push stocks higher.

While stocks ended the third quarter with their worst performance since 2011, a renewed reliance on central banks was evident in last Friday’s sudden stock market turnaround. As I write in my new weekly commentary, “As Growth Slows, Markets Seek Comfort in Old Friends,” the Dow Jones Industrial Average swung from a 250-point loss to a 200-point gain on Friday after US investors treated a weak jobs report as a sign the Federal Reserve (the Fed) will hold off on raising interest rates.

Where Can Markets Seek Comfort as Growth Slows

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Market Realist – Where can markets seek comfort as growth slows?

The graph above shows the total quarterly returns of the S&P 500 Index (IVV)(RSP) since 2011. The index fell by 5.9% in 3Q15. This was the biggest loss since 2011. Fears of a rate hike, lofty valuations, slow earnings growth–caused by a strong dollar and low energy prices, and fears of a China-induced global slowdown were responsible for the fall.

The Fed held key policy rates last month as “global economic and financial developments” made it risky to do so. The weak jobs report could mean that the Fed could further delay hiking rates. This means accommodative monetary policy could continue to support stocks (VOO), as it has done in the past few years, as the graph above suggests.

Global stocks, as tracked by the iShares MSCI ACWI ETF (ACWI), rose 6% since September 28. Weak economic data in the US can lead to a delay in the rate hike. Central banks abroad will likely continue with an easy monetary policy. We’ll discuss this more in the next part.

Meanwhile, the yield on the ten-year Treasury (IEF) fell from 2.2% on September 25 to 2% on October 2 because rates could stay lower for longer.

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