It might have felt as if the ground was opening up beneath the market’s feet when the Nasdaq Composite, the FTSE 100 and other indices gave up their entire gains for the year in just a few days. However, the case for equities remains strong.
Equities are still cheap compared wth bonds and although the pace of earnings growth might well slow, earnings are still strong. Over half of the sectors of the S&P500 reported double-digit earnings growth in the first quarter of this year.
Vertiginous drops of the kind recently witnessed are only to be expected in a market that dances to the tune of leveraged players that have just hours to unwind their precarious positions.
Investors are clearly more concerned about inflation than they were in January but confidence in the economy remains high. The recent US inflation figures, though slightly higher than expected, were hardly shocking. The market’s reaction to it is better interpreted as opportunistic profit-taking than a legitimate retreat.
What is likely to happen, however, is that investors will take the opportunity created by the correction to rebalance their sector weightings.
Mining stocks, which have already been among the sectors hardest hit, could suffer further as investors turn towards oil stocks instead, where there is significantly less speculative money driving the underlying commodity’s price.