“The bull [is] in full snorting mode,” says Vito Racanelli in Barron’s. Global stocks, as measured by the FTSE All World index, hit a new record this week. In the US, the S&P 500 hit a new peak of around 1,900, while the Dow Jones index ploughed ahead to the 17,000 level. Meanwhile, in Europe, stocks have hit a new six-year high.
The latest surge came as the US employment situation continued to improve (see chart below), while GDP growth in Japan was unexpectedly strong. Investors also started to pencil in a move to full-blown money printing in the eurozone, after European Central Bank boss Mario Draghi took a range of measures to head off deflation.
But despite signs of recovery, markets also expect central banks to keep monetary policy fairly loose. Although the US economy “is going to be getting a bit better… we’re not going to have runaway growth”, says Robert Doll of Nuveen Asset Management.
So the Federal Reserve will not be forced to wind down its quantitative easing (QE), or money-printing programme, any faster than expected. So the pattern of the past few years endures: growth is returning, but it is still shaky enough to warrant easy money from central banks.
And any future weakness would, investors assume, be met by the central bank “turning up the dial on the funny-money machine, and thus stock prices, anew”, says Liam Halligan in The Sunday Telegraph.
“Forget GDP growth, forget corporate earnings, forget company analysis of any kind, in fact. It’s all about the Fed. This blatant rigging of Western equity markets has gone on for several years now, with stocks soaring due to QE despite shaky fundamentals.”
The question is how much longer this game can continue. As we’ve noted a number of times, equity prices and valuations have raced ahead of earnings on both sides of the Atlantic. But markets can detach themselves from the fundamentals for several years before they “collapse under their own weight”, says Fidelity’s Tom Stevenson.
With the Fed still printing, Japan’s central bank prepared to do more, and QE apparently in the offing in Europe, there is still plenty of easy money potentially in the pipeline. Bears and short-sellers should beware: as John Maynard Keynes said, “markets can remain irrational longer than you can remain solvent”.