The equity market is having its best year since 2003 and its second best since 1998. Even more astounding is that fixed income is also having one of its best years ever. It has been almost impossible to avoid making money in 2012, but have investors noticed?
-Douglas Coté, Chief Market Strategist, ING
- There has been plenty to worry about of late, and investors have voted with their feet, continuing to exit the market en masse to avoid the Armageddon scenarios bandied about by the media. There is only one problem: It has been almost impossible to avoid making money in 2012. The equity market is having its best year since 2003 and its second best since 1998. Even more astounding is that fixed income is also having one of its best years ever.
- Global risks have eased in recent months. Though Europe's water-torture approach to solving its problems has been frustrating, the euro zone is not beyond repair. Investors have mistakenly analyzed each scrap of news from Europe independently instead of seeing the broader trend and the impact that word and deed were having on resolving the crisis. Investors' mispricing of the euro crisis has led to what we term the "risk gap" - an inordinate fear of any risky asset class - which has left $7.5 trillion on the sidelines during (arguably) a raging bull market.
- Of course, serious concerns remain. Interest rates on Italian and Spanish debt have reached unsustainable levels, and the ESM/EFSF bailout funds will be woefully inadequate if both countries continue to drift toward the abyss. In the U.S., a plunge off the so-called "fiscal cliff" will hurt the private economy and severely damage the after-tax return to investors for dividends and capital gains alike. And China seems to be heading for a hard landing as its most important export markets - the U.S. and Europe - either slow down or head into recession.
- As we enter the dog days of summer, policy makers must remember that the private economy's resilience has its limits. Authorities in Europe and the U.S. likely will act - whether voluntarily or forced by market events - to restore economic growth and rein in debt. Meanwhile, investors who have not capitulated are being handsomely rewarded by accepting the interim volatility, which is the price of building wealth.