By Tommy Stubbington
Global stock markets stabilized on Monday following last week's
abrupt selloff, with investors remaining confident that the
weakness marks a setback rather than a reversal of the multiyear
rally in equity markets.
European stocks posted modest gains, while U.S. stock futures
pointed to a positive start on Wall Street. The Stoxx Europe 600
and S&P 500 futures were both 0.3% higher midway through the
European session.
The relative calm comes after a shaky week that saw the S&P
500 tumble to its worst weekly loss in more than two years, and
similar pullbacks for European benchmarks.
There was no single factor behind the declines, investors say,
but a buildup of negative news helped shake a market that has grown
complacent as stocks ratcheted higher this year out of its slumber.
An escalation of sanctions against Russia over the conflict in
Ukraine, the messy saga engulfing Portugal's second-largest lender
Banco Espírito Santo, and worries about when the U.S. Federal
Reserve will raise interest rates have all contributed.
According to Gregor Hirt, chief investment officer for Europe at
UBS Global Asset Management, the initial trigger was strong U.S.
gross domestic product data last week, which raised fears of an
earlier-than expected rise in interest rates. That came at a time
when quiet summer markets meant there were fewer buyers to step in
and stem declines.
"It's not unusual to see more volatile trade during the summer
time--what we have at the moment looks like a temporary
correction," Mr. Hirt said.
Annualized GDP data for the second quarter of this year showed
growth of 4% Wednesday.
But UBS Global Asset Management, which manages $674 billion of
assets, continues to favor stocks over asset classes. Mr. Hirt
predicts markets will grow more volatile in the second half of the
year, but doesn't expect chunkier declines until the first Federal
Reserve rate increase is in sight.
"A larger pullback shouldn't come until four or five months
before the first Fed rate hike. The Fed could raise rates in the
second half of 2015. That means markets should continue climbing
until the first quarter of next year," he said.
Many investors say they have been waiting for an equity-market
wobble, but were unsure what the trigger would be.
Stock market gains have left many investors sitting on a bigger
chunk of their assets in equities than they felt comfortable with,
said Andrew Goldberg, global market strategist at J.P. Morgan Asset
Management, which has $1.65 trillion under management.
That means there has been a good reason to sell, even for
investors who think stocks will climb further. "I tell clients that
by virtue of the market going up so much, your equity allocation
has grown to something it wasn't meant to be. You should pull it
back," he said.
J.P Morgan Asset Management continues to favor stocks in its
portfolios, but has scaled back its allocation somewhat in recent
months, Mr. Goldberg said.
Even so, with S&P 500 companies that have so far reported
second-quarter earnings pointing to profit growth of around 10%
year-on-year, it is difficult to make a case for shifting away from
equities, despite concerns over the Fed and Russian sanctions.
"It is going to be difficult for investors to get too wrapped up
in all these things when companies are delivering by selling things
and cutting costs. For now, the path of least resistance is still
up."
Write to Tommy Stubbington at tommy.stubbington@wsj.com