Many people are bemused by the fact that stock markets are starting to hit new highs yet the UK and global economy seems to be in such a mess. The Dow Jones Industrial Index is up 16% this year and the FTSE 100 is very close to it’s all time high from 13 years ago. Only this week, France re-entered recession and even the mighty German economy has slowed. The price of gold, which has been going in one direction (up) and is usually the harbinger of doom and inflationary disaster, has fallen dramatically. This is not really what you would expect with so much uncertainty around coupled with the willingness of Governments to print money.
What explains the stock market bulls?
There is a little bit of fundamental underpinning of shares from a ‘value’ point of view, in that shares this century have gone sideways yet company earnings are 75% higher during this period. Companies have also had opportunities to become more efficient through technological factors, out-sourcing and overseas production. If shares are going to go higher, then there will need to be some follow through with further improvements in corporate earnings.
Low Interest Rates
Another key factor in the current bull market is low interest rates. People are saving money, banks, companies and fund managers have cash coming out of their ears and they don’t have anywhere to put it. Buying corporate or Government bonds yield next to nothing and in any case, this is not the low risk game of 5 or 10 years ago. Bubbles often start when there is lots of money chasing a dwindling number of good quality assets.
Some fund managers who would normally look towards bonds, are instead buying those shares that partly resemble bonds ie very safe, ‘boring’ companies where the stock offers some degree of yield. Examples would include utilities and blue chips like Unilever, Reckitt Benckiser, Diageo, Nestle and so on. Options here are limited and it won’t be long before these also begin to look expensive.
The Bank of England’s Quantitative Easing policy, which has caught on in the US and Japan, is all about printing bank notes – well electronically anyway. The price to be paid for this will be in the long term when demand and then inflation rear their ugly heads. However, this showering of cash which, by the way is certainly not being lent out by the banks, is adding fuel to the stock market boom.
It is impossible for anyone to predict when this latest boom will come crashing down. I suspect that the market can go considerably higher. No one wants to be the last person heading for the exit, so expect a good deal of volatility in the stock markets born out of the fact that many investors don’t really want to be there, but have nowhere else to go. Private stock market investors and holders of share ISAs should proceed with extreme care!
The stock market hasn’t lost the plot but is behaving like an episode of Dexter – it’s very entertaining because we all know that at some point there will be a blood bath!