Messages seem counter-intuitive

It is generally seen as good for asset prices that a weakening American economy forced the Fed into a second round of quantitative easing, and stockmarkets are likely to be dominated by this theme.

Unhappily, markets seem to be in the grip of quantitative easing fever, and returns will probably be dominated by this theme in the final quarter. However, a double-dip remains unlikely, company earnings are robust and more importantly for the year-end rally, in a few months’ time, 2012 earnings become next year’s earnings. This means that on forward numbers, the market looks even cheaper, with 10% earnings growth set for 2012. All that can be said for sure is that earnings will not be 10% greater in 2012 – they will be any number but that, which is analysts’ default setting for “don’t know, haven’t looked yet”. But they will look soon, as the fourth quarter is upon us. In the absence of quantitative easing, company earnings are all we have to lift us further, and we will get a proper sense of them in a couple of weeks.

It seems prudent to keep focused on higher-quality stocks with decent yields, which provide some cushion against a slowing economic environment. Meanwhile, keep close attention on inflation rates, and beware a wholesale move out of bonds attendant on the quantitative easing announcement.