The Economy | An Upset Stomach or Terminal Cancer? (The Economist)

Buttonwood

Queasy feeling

The equity markets are struggling in the face of slower growth and central-bank inaction

Jun 9th 2011 | from the print edition

THE cavalry may not ride to the rescue this time. Equity investors have been relying on the Federal Reserve for support ever since the American central bank presaged a second round of quantitative easing (QE) last August.

In a November article for the Washington Post, Ben Bernanke, the Fed’s chairman, acknowledged the impact of QE on shares, stating that “higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.” But with the current round of QE about to end, Mr Bernanke gave no hint that a third programme was on its way in a keenly awaited speech this week, acknowledging merely that “economic conditions are likely to warrant exceptionally low levels for the federal-funds rate for an extended period.”

The speech was a further disappointment for global stockmarkets, which have been declining fairly steadily since early May. Indeed, the mood may have changed even earlier. “Defensive” stocks (businesses like utilities and food retailers, where consumer demand is relatively resilient) started to outperform cyclical businesses in February (see chart). That shift was probably in response to a downturn in the results of purchasing managers’ surveys of business confidence. Ten-year Treasury-bond yields peaked at around the same time.


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