The news that Fed chairman Alan Greenspan believes the US economy will have a soft landing could not have come at a better time. Investment IFAs and fund managers were just beginning to voice concerns about clients getting jittery about the current state of markets worldwide.
Greenspan has reassured the market that the Fed is watching the economic slowdown and will take the necessary action to avoid a hard landing.
Taking confidence from the news, the Dow Jones ind ustrial average rose by 3 per cent and the Nasdaq rose by over 10 per cent to make its biggest ever gain. But these gains were short-lived. The Nasdaq closed down by 3.2 per cent the following day and the Dow Jones industrial average fell back by 2.3 per cent.
But despite the volatility which has been typical of this year, UK analysts rem ain optimistic that news from the Fed will give the equity market some security that there will be a resumption of growth.
Threadneedle head of fix ed-income strategy Laur ence Mutkin says: “Soft landings and hard landings often both look the same in the early stages and it is always subject to ongoing developments. But the evidence so far does not say the economy is collapsing. The Fed is being neither complacent nor panicky. It is watching things very closely and this can only be good news for investors.”
Scottish Equitable Asset Management is, like Thread needle, not concerned about its US funds or a global recession. Head of US equities Elaine Heaton-Armstrong says: “We are in the soft landing camp. Inflation is not a problem as consumer spending and capital spending are low. Although the market consensus might fall towards a rough landing where GDP is 3 per cent or under.”
But Heaton-Armstrong says the key factors determining how the markets will fare are yet to emerge.
Technol ogy could come to the fore once again and, if so, the US markets could regain their status as global leaders. She says: “Capital spending on technology and tele com munications will be important. But we will not have a clearer view until January when spen ding budgets are released.”
Most analysts think the long-term stability of glo bal markets is not in doubt as long as inflation is kept low. Forsyth Partners head of inv estment Rossen Djounov thin ks we could see a sustained rally until the year-end and he too is more interested in the performance of technology and whether it will lead the growth.
He says: “We should see if the market builds on its gains or if it goes back to where it came from. If we can slowly build on the levels, it will be seen as a positive.
“The chances of a soft landing are significant and the Fed intends to reassure the market of it. The question should be more about who is going to lead the market.”
Fund managers and inves tors should take comfort in Greenspan's assurances that the US markets are not likely to suffer from recession. Many IFAs are keen for clients to invest now.
Simpsons of Brighton partner Andrew Merricks thinks there is no need for investors to fear a further downturn and that people should cash in on the confidence Greenspan has given to the market.
He says: “Greenspan is brilliant at manipulating markets and I do find it difficult to see how the markets can collapse to any great degree. With the weight of money that is invested in the market, there must be some support for equities. The worst thing that could happen would be a slow motion crash.
“But as an investor I do not see any point in hanging on. If you are not happy with ret urns on cash, it is a good time to be looking at putting something into the market. There are always storm clouds around but the downside risks are not that great.”
PMI Independent Adviser director John Stewart is continuing to advise clients who understand the risks of the stockmarket and are looking to make long-term investments.
He says: “We think the market will continue to go forward. If you are investing for the right reasons and for at least five years, a short-term blip in the markets can easily be recovered. The Fed's move has got to be positive. If it is prepared to step in if things get worse, it is at least giving some short-term comfort to long-term investors.”
Of course, even Greenspan does not have a crystal ball and traders now seem more willing to play the waiting game. If funds are to wea ther the storm from any fur ther volatility, managers will have to do more than choose the right sector. Stocks chosen within a sector are vitally imp ortant to stave off risk if recession does hit.
But it is clear that managers can take confidence in the willingness of the Fed to take on the rough and tumble of the US market. Equity funds have been given some security that the markets will land sunny side up.