Fire but no light

  • Written by 

    Hans F. Olsen, CFA, April 2015

  • 10/04/2015

The closing days of March mark the beginning of the campaign season for three of the Group of Eight economies. In the patois of the political chattering class, the “Silly Season” has begun. In the United Kingdom, where general elections are mercifully short, Parliament was dissolved on March 30, clearing the way for the general election on May 7.

NASDAQ: the bubble returns? 2 of 3 Compass April 2015

Residents of the United States, please read this important information before proceeding

In the United States, where Presidential campaigns never seem to end, the first entrant in the 2016 election declared himself. More will follow. Finally in France, local elections have essentially marked the start of the 2017 general election campaign and have confirmed what most knew: its electorate was in the midst of a fundamental shift away from the policies of the country’s Socialist government.

More often than not, in the electoral season, much is proclaimed and promised, but little is meant or delivered. However, these periods are important as they offer investors and businesses a glimpse at the shape of things to come. Will a new government find willing legislative partners; will the program(s) that the victors used to acquire power have a chance of coming to fruition?

To the long-time observer of political matters, these seasons create more questions than answers. Electoral campaigns are essentially periods of known uncertainty. Markets often have a reflective quality that projects back the environment in which they operate. Indeed, while this year is still in its childhood, it has been marked by the uncertainty induced by serial questions about the path of earnings, valuations, central bank policies, and legislative initiatives.

This is most easily seen in market returns in the developed world. Markets that operate within a relatively clear central bank policy appear to be performing well, judging from index returns that sit within the purview of the European Central Bank and the Bank of Japan, while those that operate within the context of less clear monetary policies have struggled to maintain forward momentum: to wit the United Kingdom and the United States. (Figure 1)

FIGURE 1: Local currency returns are tied to central bank policy

Source: Bloomberg, price return only from 31 Dec 2014 through 30 Mar 2015. Past performance is no guarantee of future results. An investment cannot be made directly in a market index.

Clearly the performance of these markets is influenced by more than the clarity of central bank policy, but its impacts are not lightly felt. Like sea fog that hinders the mariner's way, this uncertainty will dissipate eventually. It complicates but doesn't obstruct.

With the notion that markets are not monolithic and therefore not equally influenced by uncertainty, in this month's edition of Compass we look at the performance of the NASDAQ Composite Index, which has achieved levels not seen since the apex of the technology bubble in 2000. The NASDAQ of 2015 should not be confused with its former self in composition or valuations. It is an interesting study in contrasts that every investor should be aware of.