LONDON -- World shares and bonds stabilized Thursday while gold and the euro recovered slightly, after data suggested the U.S. Federal Reserve may leave its stimulus program in place a bit longer than markets have been thinking.
The market tone improved overnight after a surprisingly sharp downward revision to first-quarter U.S. economic growth, which calmed fears the Fed would soon wind down the huge bond-buying scheme that has underpinned investors' risk appetite.
European shares saw their first session of relative quiet in a week. They consolidated the 3.2 percent recovery they have enjoyed over the last two days after last week's 11 percent dive in response to the Fed's signal on cutting stimulus.
A 0.4 percent rise on London's FTSE 100 outshone broadly flat markets in Paris and Frankfurt, and left Asia's earlier rises as the main driver for the third day of gains for MSCI's world share index.
"Whenever there is good news out of the U.S. it will cause selling because people see it as a confirmation for Fed tapering, while if we have something more disappointing like yesterday people will say, 'Well, OK, it won't happen yet,' " said Tobias Blattner, an economist at Daiwa Securities.
"That, unfortunately, is the kind of volatility that is going to continue for the next couple of months."
With the rise in benchmark 10-year U.S. government debt appearing to have come to a halt at around 2.4 percent, eurozone bonds from Germany to Greece were able to claw back some of the ground they have lost during the recent global selloff.
Reflecting the rise in yields generally over the last few weeks, Italy paid its highest rate since March at a €5 billion auction of 10- and 5- year debt, but healthy demand at the sale meant there was little to unnerve markets.
After the drama of recent days, there was some respite for precious metals although analysts expected it to be temporary.
Spot gold rose 1 percent to $1,235 an ounce, after a 4 percent fall on Wednesday that took the metal to $1,221.80, its lowest since August 2010. Silver, which sank 5.5 percent in the previous session, gained about 2 percent.
In a note to clients, analysts at ABN Amro lowered their end-of-year forecast for gold $200 to $1,100 and said this year's 25 percent drop in gold and near 40 percent plunge in silver prices showed that "investors are losing faith in precious metals."
The easing concerns about a pullback in U.S. stimulus helped oil climb above $102 while in the currency market, mixed eurozone data saw the euro wobble, leaving it at $1.3014, having earlier pulled away from a three-week low against the dollar.
ECB policymakers have been out in force in recent days saying that unlike the Fed, they remain ready to cut rates if needed. Data from the central bank Thursday explained some of those concerns. Lending to eurozone firms contracted further in May as the bloc's long-running recession continued to sap appetite for investment and spending.
But at the same time there was a small pick-up in this month's European Commission consumer and business confidence survey, Germany saw unemployment ease while a data revision meant eurozone neighbor Britain didn't suffer a recent "double-dip" recession after all.
If You Only Know 5 Things About Investing, Make It These
World Stock Markets Steady as Fed, China Fears Ease
Warren Buffett is a great investor, but what makes him rich is that he's been a great investor for two thirds of a century. Of his current $60 billion net worth, $59.7 billion was added after his 50th birthday, and $57 billion came after his 60th. If Buffett started saving in his 30s and retired in his 60s, you would have never heard of him. His secret is time.
Most people don't start saving in meaningful amounts until a decade or two before retirement, which severely limits the power of compounding. That's unfortunate, and there's no way to fix it retroactively. It's a good reminder of how important it is to teach young people to start saving as soon as possible.
Future market returns will equal the dividend yield + earnings growth +/- change in the earnings multiple (valuations). That's really all there is to it.
The dividend yield we know: It's currently 2%. A reasonable guess of future earnings growth is 5% a year. What about the change in earnings multiples? That's totally unknowable.
Earnings multiples reflect people's feelings about the future. And there's just no way to know what people are going to think about the future in the future. How could you?
If someone said, "I think most people will be in a 10% better mood in the year 2023," we'd call them delusional. When someone does the same thing by projecting 10-year market returns, we call them analysts.
Someone who bought a low-cost S&P 500 index fund in 2003 earned a 97% return by the end of 2012. That's great! And they didn't need to know a thing about portfolio management, technical analysis, or suffer through a single segment of "The Lighting Round."
Meanwhile, the average equity market neutral fancy-pants hedge fund lost 4.7% of its value over the same period, according to data from Dow Jones Credit Suisse Hedge Fund Indices. The average long-short equity hedge fund produced a 96% total return -- still short of an index fund.
Investing is not like a computer: Simple and basic can be more powerful than complex and cutting-edge. And it's not like golf: The spectators have a pretty good chance of humbling the pros.
Most investors understand that stocks produce superior long-term returns, but at the cost of higher volatility. Yet every time -- every single time -- there's even a hint of volatility, the same cry is heard from the investing public: "What is going on?!"
Nine times out of ten, the correct answer is the same: Nothing is going on. This is just what stocks do.
Since 1900 the S&P 500 (^GSPC) has returned about 6% per year, but the average difference between any year's highest close and lowest close is 23%. Remember this the next time someone tries to explain why the market is up or down by a few percentage points. They are basically trying to explain why summer came after spring.
Someone once asked J.P. Morgan what the market will do. "It will fluctuate," he allegedly said. Truer words have never been spoken.
You need no experience, credentials, or even common sense to be a financial pundit. Sadly, the louder and more bombastic a pundit is, the more attention he'll receive, even though it makes him more likely to be wrong.
This is perhaps the most important theory in finance. Until it is understood you stand a high chance of being bamboozled and misled at every corner.