Despite the large losses in the markets this month, the majority of investors remain optimistic about a returning bull market.
Throughout October, the market has seen massive volatility and sell-offs because of alarming macroeconomic events developing throughout world. Fear of an Ebola pandemic, violence in the Middle East, slowing economies around the world and the appreciation of the U.S. dollar all have hurt the market and have sent some investors running for safer debt securities such as bonds.
But this has not stopped most investors’ confident outlook. In fact, most hedge fund managers believe equities will outperform other assets over the year, particularly U.S. stocks. Expectations for the Dow are over 18,360 (12 percent gain) and 15 percent for the S&P midway through 2015. Of course, one should tread carefully because last time there was an economic slowdown in Europe, like what is currently happening, there was a massive sell-off of U.S. stock.
Andrew Simmon of Morgan Stanley Global Investment believes that “this time, the U.S. economy is on stronger footing,” implying that the reacting U.S. decline will not be as great and the rebound of stocks will be even greater. Some stocks are even paying dividends that allow them to rival current bond coupon payments because of the pressure of the Fed on interest rates.
Some of the many arguments supporting this hypothesis and majority consensus are the fact that the U.S. has become less reliant on oil imports and it has become a leader in biotech and social media; this decrease in reliance has pushed oil prices down to around $83.02/barrel. Energy costs in the U.S. have decreased overall, which some argue is just as beneficial as a tax reduction.
In regards to fixed income, only 3.5 percent of big money managers believe bonds will outperform other assets. For the most part, managers are bearish on bonds: 91 percent believe Treasuries will be bearish, 86 percent believe the same for U.S. corporate bonds, 81 percent on non-U.S. bonds, and 68 percent on tax-free municipals. The 10-year treasuries fell drastically on Oct. 15 because of the 350 point tank of the Dow at the opening bell, but has increased back to roughly 2.2 percent as markets are returning to normal levels. It is nice to realize that as the demand for bonds increase, their price increases, having a negative effect on bond yields, or the interest rate paid on bonds.
More recent negative impacts on the Dow and NASDAQ Composite are the huge declines in IBM and Netflix shares. Netflix has begun to correct itself, but IBM had weighed down the Dow about 50 points by itself because of its horrendous earnings report. However the Dow experienced a mid-day rally amending for the dead weight. Although major hedge fund managers insist that the bull will return, they could be dishing out their own bull in order to get the market to remain optimistic and do what they want; the true outcome, in the end, is arbitrary.