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The market cap of global equities has reached a new post-recession high this past week, thanks in part to the weak dollar. (U.S. equities are still about 3% below their April highs.) What's propelling things upward is anybody's guess, of course, but from my perspective this rally is in large part about things that were feared that didn't happen—like a double-dip recession or a deadly bout of deflation or more policy mistakes. The fundamentals—strong corporate profits, abundant liquidity, strong commodity prices, lower swap and credit spreads—have been looking good for quite some time.
True, the prospect of further central bank accommodation has been much-discussed of late and that could be a factor behind the rally as well. But I prefer to think that markets don't react well to impending policy errors, such as would be the case for QE2. Instead I think that in addition to cheering the bad things that didn't happen, markets also are reacting to the prospect of fewer policy errors going forward, and the elections to be held in 20 days are very likely going to make that possible. The Bush tax cuts have a good chance of surviving. Federal spending is very likely to slow down. ObamaCare could suffer arrested development. Cap and trade is a creature of the past. Washington is very likely to become less anti-business and with a little luck might even become a bit pro-business. The people are going to give a raft of new politicians a strong mandate to fix the economy, and that can only be done by turning loose the energies of the private sector.
There are lots of reasons to be optimistic these days.
5 comments:
One question is will the new Washington allow the necessary foreclosure process to continue
or screw it up by too much government involvement....
Scott,
I think all of what you suggest is playing a part. From my perspective the primary driver is the Fed and their QE plans. It is giving confidence to the bulls and bringing pain to the bears. Some of this is short covering. Money is also beginning to leave the bond market (see LQD and especially TLT)and is hunting yield. The inflation trade (gold, copper, etc.) is spreading into equities, especially those of high quality and paying dividends that are likely to be increased over time. Emerging market bourses have really been performing well (see EEM).
Many will complain that it is all artificial and will end badly and they have their points. But for the time being, the market believes the Fed is going to shoot the bazooka and asset prices are going up, not down.
From my perspective, we cannot stimulate this economy enough.
I know guys out of work. I see empty building galore in Los Angeles.
Tax cuts, reg cuts, QE--pour it on, and harder the better.
Core inflation is sinking to deflationary levels, and still some central bankers are pettifogging about the perils of inflation.
The Fed staff said at last FOMC meeting core inflation will sink for two more years.
The field is wide-open for monetary stimulus--it doesn't get much more wide-open than this.
You could score a bunch of grwoth topuchdowns without an inflationary tackler getting close
Benj,
It appears it is going to happen. They (the fed) could try to stretch it out into next year to see what the new congress is about but I think that idea backfires. To get some inflation in asset prices the risk markets need to continue to advance. The markets are pretty convinced that the fed acts at the next meeting (after the election). Disappointment would seem to be counterproductive.
Markets do not move long in straight lines so we can see pullbacks anytime. My premise is that they will be nothing more than that and that the trends we have in place have further to run.
Just my cheap opinion.
Scott,
Despite my hopes for a change of power in the House and Senate, I don't see the Republicans gaining a coalition of 60 seats in the Senate, which would be necessary to meet pay go rules, and undo the pending tax increases.
I hope I am wrong.
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