Last month finished on Thursday the 30th, but for investors June 2011 ended when California based fund managers finally switched off their screens on Friday 1st July and went home for the Independence Day long weekend.
For most of the month markets were in retreat as judgements had to be made about the implications for the end of the $600 billion Quantitative Easing programme in the US (QE2) and daily events in Greece. On top of this there was a steady stream of evidence supporting the view that economic growth was faltering.
For fund managers trying to close out positions ahead of the month end prior to writing persuasively about the many good decisions they had made not only during June but over the first half of the year, the last few days of the month were particularly trying. Just a few hours difference in closing the books made all the difference between happiness and unhappiness. When on 29th June the Greek parliament voted to approve the austerity package, investors reacted with enthusiasm. Only the day before the FTSE 100 Index was down 4.5% for the month but by the close of business on 1st July we were back to where we started at the end of May. Volatility executed a similar U-turn but in reverse with the ViX falling by 23% in 3 days from 20.6 to 15.9. ‘Risk off’ investments such as 10 year gilts mirrored equities in an equal and opposite way.
Commodities stood out as a very dull beacon of stability with only copper joining in the equity fun. Despite chaos in Greece it was interesting to see that both gold and silver drifted lower, down by 3% and 12% for the month. Not much sign of investors abandoning paper currencies even those with serious credibility problems such as the Euro and the Dollar.
What conclusions, if any, should we draw from all of this? Was the market correct in marking down prices for most of the month or was this just a case of mid-year blues? Alternatively was the 3 day bounce just another example of irrational exuberance?
Despite the parliamentary vote Greece is still in a lot of trouble. The various sticking plaster solutions initiated by the ECB and IMF have failed to deliver a long term solution. It is now the turn of politicians in Greece and across Europe to try, but again the proposed plans fail to address the key point which is that a heavily indebted, low growth economy will be a miserable place to live and work for many years. Expect the Greek voters to have the final say, but perhaps only when Athens cools down and demonstrations become less uncomfortable.
As yet there is no discernable evidence that the end of QE2 is having an effect on prices. The consensus in the US is that QE3 is unnecessary although the debate continues.
All this background noise makes it easy to miss good news. Economic indicators on both sides of the Atlantic are now turning up and importantly the Chinese Premier has declared that inflation is no longer a problem. At a company level there is plenty of good news about profits, dividends and growth opportunities. Corporate activity continues as cash rich successful companies try to pick off weaker competitors. We might even see an increase in economic activity in Japan as re-construction gets started.
As we enter the summer lull with half strength investment teams and low trading volumes it would be a mistake to take a back seat. Events beyond the scope of financial analysis will continue to dominate sentiment, most likely in a negative way, but underneath the investment fundamentals are sound. The message of the last month is that after 10 years of underperformance relative to bonds, there are plenty of optimists positioning themselves for the next equity bull market.
