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A credit squeeze, financial market turmoil, declining stock markets, recessionary threats, a fait accompli, or so many market participants “logically” reasoned at crunch time in July and August.

Ah, but how have things turned out so differently, at least for the moment? “Look what they’ve done to my song, ma, and they turned it upside down.” I can hear Melanie’s voice intoning the sad lyrics.

Say hello to “inflate or die,” the era of easy monetary policy piloted by:

Hat tip: Michael Nystrom, BullNotBull.com

With inflation bombs hitting target ever since the announcement of the U.S. discount rate cut on August 17, reflation trades were back in vogue. And, alas, global stock markets staged a solid recovery.

The following chart of the Dow Jones World Index depicts how events on global stock markets unfolded over the tumultuous third quarter:

Source: StockCharts.com

Just how strong the rally has been is illustrated by the fact that 50 of the 53 stock market indices in the accompanying table managed to record gains (in U.S. dollars) during September. For the full quarter a larger group of 24 markets were down, over six months only five (Dublin, Sri Lanka, Jordan, Tokyo Topix and Nikkei 225 Average), over the year-to-date period also five (Dublin, Sri Lanka, Jordan, Tokyo Topic and Venezuela), and over the last twelve months only a single country, Jordan, ended up in the red. Sorry guys, I couldn’t find a chart for what literally appears to be a bombed-out market in Jordan.

Unsurprisingly, emerging markets, thus far virtually unscathed by the subprime fall-out, fared much better than developed markets during the third quarter, with the MSCI Emerging Markets Index advancing spectacularly by 13.7% (see the top section of chart below) compared with the MSCI World Index’s lacklustre 2.0%. The strong upwardly sloping trend of the relative strength graph in the bottom section tells the story of emerging markets’ outperformance.

Source: StockCharts.com

There are no prizes for guessing the biggest gainer over the three-month period to September 30 – yes, it was again the Chinese Shanghai Composite Index shooting the lights out with a startling quarterly increase of 47.4%. Runners-up were the Turkey Index advancing by 25.7% and the Hong Kong Hang Seng Index up 25.4%. The other BRIC countries – Brazil, Russia and India – also performed strongly.

Incidentally, China was also the best performer over the six- and 12-month measurement periods, but got pipped into second place by Egypt over three years (+65.3% a year for Egypt versus 63.7% a year for China). This raises the question: can markets stay overbought forever?

Source: StockCharts.com

Source: StockCharts.com

Still battling with a stop-start economy and deflationary woes, the Japanese Nikkei 225 Average disappointed with a decline of -0.7% over the quarter.

Source: StockCharts.com

Out of the U.S. stock markets, the Nasdaq 100 Index assumed leadership with a quarterly increase of 8.8%, followed by the Dow Jones Industrial Index with 3.6% and the S&P 500 Index with 1.6%.

Pan-European stock markets in general fared worse than the US markets, with the German DAX Index gaining 3.1%, the UK FTSE 100 Index up 1.4% and the French CAC Index down -0.5%.

Bright diamonds: The following stock market rankings have improved considerably compared to the six-month rankings:

Source: Plexus Asset Management (based on data from I-Net Bridge)

Source: StockCharts.com

Lame dogs: The stock market rankings that have slid down most on the ranking table were represented by the following mixed bag of indices:

Index

Three-month ranking Six-month ranking Change
Pakistan 54 29 -25
Philippines 47 20 -27
Hungary 48 14 -34

Source: Plexus Asset Management (based on data from I-Net Bridge)

Source: StockCharts.com

I have just completed the mean feat of a one-year period of injury-free running – a life-long record! This was accomplished by simply taking some pressure off myself by not running races, and by not being obsessed with new PB (personal best) times. Call me “Steady Eddie” du Plessis!

I guess I am just a run-of-the-mill jogger, but nevertheless cannot help draw an analogy with the rampant behaviour of stock markets. Too much too soon, especially with the fundamental base perhaps not being what generally makes for uncharted territory? Remember, injuries can be screamingly painful, and sometimes require long periods of convalescence. “Pop ‘n Drop,” as good friend Toddo Harrison may phrase it in the context of stock markets.

Click on the following link for the detailed performance figures:

Global stock market price movements (pdf)

Source: What's Gotten Into the Global Markets?