Market Reaction to Draghi’s Speech
On this edition of Market Week in Review, Todd LaFountaine, program director, advisor insights, chatted with Chief Investment Strategist Erik Ristuben about the market’s reaction to European Central Bank (ECB) President Mario Draghi’s speech earlier in the week.
The exact meaning of Draghi’s speech was very challenging to decipher, Ristuben emphasized. The initial reaction among many was that he was making a fairly hawkish statement. This is because Draghi first talked about how the ECB had to be persistent in pursuing a monetary policy that brought inflation in line with its objectives. Then, Ristuben noted, Draghi went on to reference a possible rewind of the fiscal stimulus and a halt of asset purchases.
The market interpreted this as Draghi’s way of preparing investors for the dreaded taper conversation in September – that is, the scaling back of the ECB’s monetary stimulus program. As a result:
- There was a selloff in European equities. Ristuben noted that the STOXX® Europe 600 Index is off about 2.8%, the S&P 500® Index is off about 0.5%, and the NASDAQ Composite Index is off about 1.8% since the beginning of June.
- The Euro appreciated relative to the U.S. dollar.
The ultimate question, according to Ristuben, is whether or not Draghi was actually trying to prep the market for potential taper talks in September. What he was more likely attempting to do, in the view of Ristuben, is demonstrate to the market that much of what the ECB has been doing is working. For example, the European economy is becoming more self-sustaining and doesn’t need as much support in the future as it’s had. Therefore, in Ristuben’s view, Draghi was simply saying that when the ECB reaches the point where it needs to start removing some of the measures it put in place to spur economic growth, it’ll be prudent.
“It was an interesting week,” Ristuben concluded, “but I don’t think Draghi is locked into a September announcement on the taper in any way, shape or form.”
Halfway through of the year—What should investors focus on?
With the calendar at the halfway point of 2017, the discussion turned to what investors should focus on in the second half of the year.
One big focus point is the health of the European economy, which continues to perform well. Russell Investments strategists believe that European stocks are more attractively priced and earnings trends are better out of Europe than in the U.S. Ristuben continues to see the U.S. market as overvalued.
Overall, in the second half of 2017, Ristuben and other Russell Investments strategists expect that:
- The economic data outside the U.S. will continue to be stronger than in the U.S.
- The U.S. stock market will continue to lag behind Europe and emerging markets.
- There’ll be a possible upswing in volatility. Ristuben pointed out that the volatility in the market (as demonstrated by the Chicago Board Options Exchange (CBOE Volatility Index®), has been “ridiculously low” in the minds of Russell Investments’ team of strategists. “There’s a lot of complacency out there,” Ristuben said, “and we do think that complacency is going to be challenged as you continue to see economic data in the U.S. that disappoints relative to people’s expectations.”
Ultimately, Ristuben concluded, stocks in the U.S. are expensive. “People should be expecting and preparing for a pullback in the U.S. equity market—a correction. In our minds, that’ll probably be a buying opportunity—but people should be ready for it.”
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Date of first use: June, 2017