Thus far during 2014, investors have felt a fairly limited effect from the abundant geopolitical threats that could normally be relied upon to spur a run on risk appetite. Technology stocks advanced in late June to a 14-year high, while investors seemed to wallow in the warm waters of repeated records for the S&P 500 Index. One of the more impressive features of the ongoing rally is the behavior of both small caps and technology stocks since early May. Two months earlier as the so-called momentum stocks lost favor among investors, the broader S&P 500 /Index outpaced most other benchmarks. That had the impact of giving the bull market the appearance of becoming weak in the knees. So the rebound in leadership from small caps and technology issues has redoubled investors’ faith in the rally (see “Small caps step up,” below).
A year ago equity and fixed income markets overreacted to the threat of tapering and both have learned to live—even thrive—with it once traders understood that tapering is not tightening. Tightening is inevitable, but not imminent, so it is hard to see how the outlook for equity prices for the rest of 2014 will differ from the first half of the year.
For sure, geopolitical risks abound, but in the absence of a terror-like event, it is hard to envision what would set off a major market correction. Of course, the other major threat to disrupting the rally is a turnaround in sentiment towards bonds.
The views expressed herein are the personal views of the author and are not intended to reflect the views of Interactive Brokers Group or any of its affiliated companies.
Andrew Wilkinson is chief market analyst for Interactive Brokers and a seasoned trader and commentator of global financial markets. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media.