The September US Central Bank’s “tapering” decision took almost everyone by surprise. The S&P 500 index rallied to a new high of 1730 however, since then, with the help from the US Congress, US equities have rediscovered gravity and pulled back. It is also evident that the Fed will err on the side of caution and would like to see signs of inflation picking up before dialling down monetary policy. Over the past month, several key hazards seem to have been resolved. The US Fed has kept its monetary policy supportive, current Fed Vice-Chairman Janet Yellen is back as the favourite to replace Bernanke, elections in Germany have passed and returned a more pro-Euro mandate and a potential US/Syrian conflict seems to be heading towards a global diplomatic solution. There was a time not so long ago, when the world looked to the US for both political and economic leadership. Not anymore. The current malarkey in Washington is about nothing more than egos that must be protected and soothed. In leading to the US government shutdown, neither side budged an inch in the negotiations and both sides eventually embraced a shutdown. It may be a “zero-sum” game for the politicians, but if played for too long, it could have negative implications for the economy. European equities continue to outperform and Italy’s political situation is looking more upbeat. I still recommend being long Europe, Japan and US equities. Any dip in equities caused by the US debt-ceiling stalemate, should be seen as a buying opportunity. I do not see the S&P 500 Index going below 1600. I remain positive that at the end of the year, the S&P 500 index will hit my target of 1744.
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