Welcoming, and Worrying About, a Record Market
Comment of the Day

March 06 2013

Commentary by David Fuller

Welcoming, and Worrying About, a Record Market

Here is the opening from this interesting and topical editorial from Bloomberg
The stock market, in normal times a reliable proxy for an economy's health, reached record levels this week. And why not? Corporate profits are higher than ever. The housing market is springing back. Auto sales are on pace for the best year since 2007.

At the risk of sounding like party poopers, these aren't normal economic times and the stunning four-year rally, during which almost $10 trillion has been restored to U.S. equities, is both a welcome trend and a reason for worry. Individual investors who are tempted to join the party should take special care.

A rising stock market gives off a rosy glow, and not just because it makes investors richer. It enhances what economists call the wealth effect: When household worth goes up, consumers open their pocketbooks wider. The increase in demand for homes, cars and other big-ticket items in turn leads employers to hire, which lowers unemployment and further drivesconsumer confidence. Quarterly 401(k) statements reflect the robust stock market, keeping the virtuous cycle going.

Share price increases tend to feed on themselves because they coax more investors into buying. This is especially true of individual investors, many of whom steered clear of stocks after the 2008 financial crisis, and are now piling back in. In January, equity mutual funds, which cater to retail investors, registered an inflow of almost $38 billion, the highest amount in nine years, according to the Investment Company Institute, a trade group. The previous month, investors had pulled almost $31 billion out of these funds.

David Fuller's view If it looks like a bull, moves like a bull, and sounds like a bull (including the wall of worry), it probably is a bull.

If that sounds flippant, trite or worse, I make no apology.

Of course, we can tell the market what to do but it may not pay attention. We might guess correctly but too often we will be imposing our own theories, biases or preferences. We may also be driven by ego.

OK, this bull market may seem unfamiliar in some respects but the equities we focus on are earning profits and mostly paying dividends. They look more attractive than Western government bonds and JGBs, as Fullermoney has been saying for some time.

More importantly, the all-important monetary indicators remain extremely positive. Arguably, Fed Chairman Ben Bernanke has been signalling for years that he wants the confidence boosting effect of a performing stock market. A number of other central bankers are following his lead.

Equities are no longer cheap but they are not at bubble valuations either. Of course there are lots of worries out there, which tempts me to say: 'And thus it always was.' From the perspective of a technical naturalist, I would give the upside the benefit of the doubt, at least while the major stock market indices remain in overall upward trends, characterised by higher reaction lows, as we can see on many indices, not least the S&P 500 Index (weekly & daily). Currently, it would have to close beneath 1480 to indicate that more than brief resistance was being encountered near its previous all-time numerical highs.

(See also yesterday's Comment of the Day)

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