News Column

As stocks slide on geopolitical tensions, could this be the trigger for a summer correction?

July 18, 2014

YES Liam Ward-Proud For almost a year now, we've heard a string of warnings over an impending setback for global stocks. And with yesterday's shocking developments in Ukraine and Gaza, a correction seems imminent. Prices have been inflated for some time, with the S&P 500 stock index recently trading close to 26 on the cyclically-adjusted price-earnings ratio, compared to a historical median of around 16. Even the Federal Reserve has warned that "valuation metrics in some sectors appear to be substantially stretched." Years of loose monetary policy has seen investors pile into riskier assets, and the low level of market volatility appears to be fuelling investor complacency. The Vix US equity "fear index" was recently at its lowest level since 2007 - an ominous sign. With geopolitical tensions now bubbling over in conflict-ridden Ukraine and the Gaza Strip, don't expect to see a quiet summer for stock markets.

Liam Ward-Proud is business features writer at City A.M.

NO Peter Spence Yesterday's developments will no doubt shake markets, but fears of an imminent correction are overplayed. First, arguments about stretched valuations ignore the fact that traditional metrics aren't working for biotech and social media stocks. They are often young companies piling their cash into R&D, so we shouldn't expect to see strong earnings until these markets mature. Second, while the Federal Reserve and Bank of England are on a path to normalising monetary policy, both central banks have made it clear that they are ready to act if the situation deteriorates. Elsewhere, action by policymakers to revive their economies is paying dividends. In Japan, Abenomics has transformed a once stagnant economy into the fastest growing in the G7 in the first three months of this year. And in the Eurozone, there are signs that European Central Bank president Mario Draghi might do the same. All of this sets the scene for stronger earnings growth.

Peter Spence is senior online writer at City A.M.

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Source: City A.M. (UK)

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