By Anthony Harrington
One of the things that keeps traders trading - apart from money, of course - is the power the markets have to astonish. For what seems like years now economists and analysts have been predicting that all the Quantitative Easing being pumped into the global economy from the Federal Reserve, the Bank of Japan and of course the Bank of England, was going to cause equities to rise and rise. Equity markets have responded in fits and starts but they have now ignited and sprinted to all time highs. A recent article in Business Standard makes the interesting point that the 100 wealthiest people on the planet added $28.7 billion to their collective net worth in a single week when the Dow Jones Industrial Average surged to new highs in the week ending 8 March 2013.
The Dow closed at 14,397.07, a level it has not seen, in comparative terms, since May 1896. The U.S. jobless total dropped by more than expected to stand at 7.7%, the lowest since December 2008. The S&P500 is up almost 9% since the end of 2012 and we are still not three full months into 2013. The German DAX went through 8000, headed for its previous record of 8106, reached in July 2007 (and we all know what happened next).
Some of the more bearish analysts, inevitably, are predicting that this surge is simply the precursor to another 40-50% crash in equity values. Here, for example, is Chris Martleson:
"I don't relish the job of constantly pointing out the risks to the equity markets. But since few on Wall Street seem willing (or able) to do this, I'm "making the call" for a market correction, as enough variables have aligned to indicate a high likelihood of stocks heading downwards from here. I've only given one other such warning about equities before, and that was in March of 2008, when I warned of the possibility of a 40% to 60% decline in stock prices by Fall. I am making a similar call today, with the understanding that I am usually a bit early to the game with my views. Before I get into the details, the broad outline is that I see a case where speculative fevers, propelled by the Fed's $85 billion thin-air money printing program, have more or less run their course, with the Dow and S&P indexes stalled near their all-time highs ..."
For Martleson, both fundamentals (paralysis in DC, retail investors piling in) and technical analysis (too many NYSE stocks trading above their 200-day moving averages) all argue for a correction. However, if we turn to another source, the World Bank Global Economic Prosperity report, for example, we can find plenty of evidence that points to the recent stock market surges being based on fundamental - and long lasting - improvements in the global economy.
"Improved sentiment has contributed to a recovery in high-income stock markets, which are up some 10.7% since June and 12.7% for 2012. Although a deleveraging cycle continues among Euro Area banks, there are signs that it may be easing ... developing country credit quality continued to improve in 2012 with countries having received 27 upgrades (versus 19 downgrades), which compares with a total of 20 downgrades among high-income countries. Stock markets in developing countries have also recovered and are up 12.7% since June ... (They are up a lot more now!) Gross capital flows to developing countries, which fell by 15.5% in the second quarter of 2012 amid Euro Area tensions, have rebounded sharply reaching an estimated $170 billion in 2012Q4, the highest level of inflows since the crisis began in August 2008. and 13.9% for 2012 as a whole ..."
The hunt for yield is on again, the World Bank points out, and even Angola and Zimbabwe were able to raise money on the international capital markets, in August and September respectively, a first for both. "Exactly," Martleson would probably say, taking that as yet another sign that things were getting giddy and heading for a bust. The problem is that bears see things through one prism, bulls through another. As Martleson admits, he has a tendency to be early to the party, probably rather too early in this case. But it would take a lot of optimism to decide that the euro area's problems are now all safely behind it and that the U.S. deficit didn't matter and U.S. politicians were about to play nicely together. The reality seems to be that yes, markets are (or have been) bounding forward but no, no one knows if these highs are the precursor to further highs or the high water mark for this particular stage of the recovery, with another recession in the wings. You pay your money and you take your chances ...