March 11, 2013
Regular readers might recall that I have been confused about the state of the economic world for a while and how and why some of the major stock markets continue to rise while the news is a perpetual procession of doom and gloom (here).
Over the last week I have had something of a realisation and recognition of (what I believe to be) reality. My prediction: some of the world’s major stock markets (such as the Dow Jones and FTSE) are going to keep rising strongly for some time to come.
There are three reasons that I underpin my thoughts:
1. The weaker players are gone. The recession has been long enough that lots of poorly managed, under-capitalised, overly-indebted or marginal companies have closed their doors already. The stronger firms therefore have less competition. Perhaps not much less, but less.
2. Wage inflation will remain low. It is no secret that stock markets rise when corporate profits increase. However, it is less well known (though I have no idea why) that corporate profits tend to rise when wage inflation is low. Wages make up such a large portion of the running costs of most businesses that should they not rise for a while this translates itself onto the bottom line. Considering the unemployment situation in most of the developed world, it seems hard to imagine that people are negotiating hard for pay rises currently. This looks set to stay for the forseeable future.
3. Lots of cheap money. For some time I have believed that QE is only temporary and as and when it ends there will be “trouble”. As time passes, it has dawned on me that rather than this being a short period of cheap money, it is becoming the new normal. While interest rates are low, borrowing remains cheap (or at least cheaper than perhaps it should be). It is not easy to guess how long cheap money and low interest rates will last, but I am starting to think that it is both economically and politically impossible for many countries to end QE any time soon. This might still be here in 5 years time.
The traditional view is that when an economy struggles and is in recession, stock markets will fall. Despite worsening news from the US, UK, France, Italy, Spain, and on and on, the FTSE and Dow Jones have powered on. This, I believe, is a sign of what we all know but rarely think about. Most major companies are now so international – or global – that the trading conditions in the nation in which they are listed is not necessarily a guide to how the underlying business might perform. Companies list for business advantage these days and not for historical or sentimental reasons. Big innkeeper, not big brother.
For reference, according to the app on my iPhone, the Dow Jones stood at 14,412.77 and the FTSE100 at 6,492.63 15 minutes ago (on Monday 11th March 2013). We’ll see whether I am right or wrong.
It is a little ironic that while the EU is gearing up for what seems to be multiple layers of banker bashing (starting here) stock markets look set to deliver the kinds of returns that will provide big wins for many fund managers.
(Please understand that I disclaim any and all responsibilities to actions you might take. This post is for entertainment only and should you choose to invest or speculate, you do so at your own risk).financialguy