The erratic behavior of the financial markets over the last half-year reflects in large part the political, financial and economic instability emanating from Europe. To provide some historical perspective, more than 200 years ago Alexander Hamilton understood that forming an economic union with a common currency requires a single fiscal policy and Treasury, in contrast to the EU. Moreover, the bitter experience of the 1930’s taught the Fed that the role of a central bank is to be there as a lender of last resort, in contrast to the ECB. Not surprisingly, US equities have faired much better than in Europe, but also relative to the rest of the world, suggesting that heightened risk aversion is favoring the US beyond Treasuries. (See our previous features – Divergent Universes, Market Anomalies and Beyond US Obligations).
Global investors may increasingly turn to US equities, like high-tech, as a safe haven given current low Treasury yields and the relative stability, size and cohesion of US markets. (See our previous feature – Gauging Earnings Yields).
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