Investors who bought stocks as Europe’s credit crisis spread, Japan battled a nuclear emergency and the U.S. budget deficit swelled to a record are unlikely to view the death of Osama bin Laden as anything but bullish.
His killing in Pakistan may lure more individuals to stocks in coming months, said Thomas J. Lee, chief U.S. equity strategist for JPMorgan Chase & Co. in New York. While the attack may create a martyr for terrorists, it will spur traders to sell commodities and buy shares, said Jim O’Neill, chairman of Goldman Sachs Asset Management in London. The dollar’s retreat won’t be curbed, said Kathleen Brooks, research director at Gain Capital Group LLC.
Bin Laden’s death marked the end of a 10-year manhunt encompassing two global bear markets in stocks that began with the destruction of the World Trade Center in New York on Sept. 11, 2001. While some strategists attributed only symbolic importance to the operation and U.S. equities fell yesterday, Lee said investors will reap benefits as confidence in the U.S. and President Barack Obama increases.
Yesterday’s market reaction was “basically noise,” Lee said in an interview on Bloomberg Television’s “In the Loop” with Betty Liu. “It’s positive because people have been avoiding stocks because they think they’ve been risky, and part of it is global security. This is going to basically really boost inflows into stocks.”
U.S. stocks retreated yesterday, pulling the Standard & Poor’s 500 Index down 0.2 percent to 1,361.22 after it reached the highest level since June 2008. Yields on 10-year notes fell one basis point, or 0.01 percentage point, to 3.28 percent at 5:11 p.m. in New York, according to Bloomberg Bond Trader prices, after rising as much as three basis points.
The dollar touched the weakest level in 16 months versus the euro, while oil for June delivery fell 41 cents to settle at $113.52 a barrel in New York.
The benchmark gauge for American equities has rallied 8.3 percent from this year’s low on March 16 as Japan avoided a nuclear meltdown following its biggest earthquake on record. The MSCI All-Country World Index of emerging and developed market stocks has rebounded 10 percent since March even as Obama sought $4 trillion in deficit cuts within 12 years and Greek and Irish bond yields increased amid concern over Europe’s debt crisis.
The S&P 500 slipped 0.2 percent to 1,358.72 as of 10:26 a.m. in New York today.
Investors added $598.6 billion to mutual funds that purchase debt in the two years ended March 31, compared with $30.6 billion for equities, according to Washington-based Investment Company Institute data. The S&P 500 has gained 110 percent including dividends in the past 26 months, data compiled by Bloomberg show.
“It is a positive symbolic gesture for U.S. leadership, and Barack Obama in particular,” said O’Neill, of Goldman Sachs Group Inc. “Of course, beyond this immediate reaction, markets need to be careful as bin Laden has possibly not been the single biggest security threat directly for many years, and those who will regard him as a martyr won’t give up as a result of his killing.”
Investors are enjoying the biggest bull market in 54 years after 76 percent of S&P 500 companies beat first-quarter earnings projections as the economic recovery continued. Gross domestic product expanded 1.8 percent in the first quarter. It will rise 3.2 percent this quarter, and accelerate through the end of the year, according to the median of economists’ estimates compiled by Bloomberg.
The S&P 500 has risen eight straight months when dividends are included, matching its longest streak since 1995, data compiled by Bloomberg show. Gains have come as Obama’s Democrats in Congress struggle to find common ground with opposition Republicans on how to reduce the fiscal deficit. U.S. government debt has more than doubled to a record since the 2001 attacks to $14.3 trillion, partly due to spending on military actions in Afghanistan and Iraq.
The rally has driven the VIX, the benchmark index for U.S. stock options that measures the cost of using them as insurance against declines, to three-year lows. The Chicago Board Options Exchange Volatility Index, as the index is known, fell to 14.62 on April 28, the lowest close since June 2007 and a drop of 50 percent since this year’s peak of 29.40 after Japan’s earthquake. It rose 8.4 percent to 15.99 yesterday, below its 20.36 average during its two-decade history.
VIX at 40
“Had this happened in 2009 when the VIX was at 40, we might have seen the market rally 5 percent and the VIX be down 5 points,” said Jeremy Wien, head of VIX options trading at Peak6 Capital Management LLC in Chicago. “You can’t have that here because of where we are. The VIX is already at a level that’s so low compared to recent years that it would be hard for it to come in too much more.”
Bin Laden’s killing put American and allied officials on guard against possible reprisals as they vowed to maintain the fight against terrorism. CIA Director Leon Panetta said yesterday in a message to agency employees that bin Laden’s death “struck a heavy blow” against al-Qaeda, even as he warned that terrorists “almost certainly will attempt to avenge” the killing.
Eliminating the terror group’s leader doesn’t affect the rate of expansion in the economy or company profits and won’t make North America or Europe any safer, said billionaire investor Kenneth Fisher, who oversees $45 billion at Woodside, California-based Fisher Investments Inc.
“I’d be quite surprised if this has a big impact,” Fisher said. “Al-Qaeda will still be there and we’re not becoming any more beloved by the people who hate us, so this isn’t going to solve anything. It doesn’t change earnings, it doesn’t change the economy, and it doesn’t make us free from terrorism concerns.”
Optimism spurred by the killing is unlikely to help the dollar rally, according to Brooks, of Gain Capital in London. Any appreciation is an opportunity for investors to increase bets the currency will decline because the U.S. Federal Reserve is unlikely to raise its target interest rate on overnight loans between banks anytime soon, she said.
“The Fed still dominates financial matters and right now they are on hold, which is proving to be a heady mix for risk, while also weighing on the dollar,” Brooks said.
Bin Laden’s death means financial assets will be more tied to economic data, according to Thomas Caldwell, chief executive officer of Caldwell Securities Ltd. in Toronto, which manages about C$1 billion ($1.05 billion). Reports this week may show factory orders rose in March, the rate of expansion in U.S. service industries increased, and nonfarm payrolls gained for a seventh month, according to economists surveyed by Bloomberg.
Killing bin Laden “does show America can reach out and get these people,” Caldwell said. “It’s not going to change the nature of the conflict. It’s a positive, it’s a bump, but I think markets are taking cues more from the economic things.”
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