The U.S. stock market’s continuing strength in the face of so many global problems is truly remarkable – and has been correct so far.
Meanwhile, the stock markets of three of the seven largest economies of the world rolled over to the downside last November. The markets of China, India, and Brazil are down an average of 15% since their peaks in November, and are mostly making new lows almost daily. They are three of the four so-called ‘BRIC’ countries (Brazil, Russia, India, and China) that were leading the way in the new bull market that began off the March, 2009 low. Even the Russian market has declined 5% over the last week.
Several previous market-leading emerging-market countries have also seen their stock markets rolled over to the downside. Previous high-flyers Indonesia, Malaysia, the Philippines, Singapore, and Thailand are down an average of more than 10% since November, and making new lows.
The Middle East/Africa Index has declined 12% since early January. The Latin American Index is down 10% over the last six weeks.
Yet in the U.S., and Europe, stock markets continue to rise and are at new bull market highs.
Global markets do tend to move in tandem. So it is unusual.
Is it that investors in the U.S. market know something other countries don’t know, perhaps that the worries of other countries, including rising inflation fears, the European debt crisis, the revolutionary changes underway in Egypt, the aggressive monetary tightening moves by China to slow its economy, and by emerging markets to ward off inflation, are not going to be real problems?
Or that the problems worrying other markets may affect those countries but will not affect the U.S.?
Or is it confidence that even if there are problems Fed Chairman Bernanke has the power to hold the stock market up, and will do so?
So far, the U.S. market has been correct that the problems are not affecting the U.S.
Fed Chairman Bernanke says there are no inflationary pressures on the horizon in the U.S. And economic reports, excepting those related to employment and the housing industry, continue to improve. Consumer and investor confidence continue to rise. In fact, investor sentiment in the U.S. is at unusually high levels of bullishness and confidence.
Those very few who are worried point out that the U.S. is now in its third year without meaningful corrections to cool off excesses, which has conditions at levels that in the past have been warnings of a market top being near.
For instance, one of the signs that stocks were cheap in early 2009 was that the dividend yield on the S&P 500 was 3.6% compared to only a 2.8% yield on 10-year bonds. However, with the big rise in stock prices since, that condition has reversed, with the dividend yield on the S&P 500 now only 1.8%, while the bond yield is 3.7%. That’s roughly the same dividend ratio that was in place at the important bull market top in October, 2007.
Then there is that investor confidence, which is actually not a good sign. Investor sentiment, always very bullish at market tops, and very bearish at market lows, was at extremely bearish levels at the low in early 2009, convinced the market could only go lower. It is now at extreme levels of bullishness and confidence, convinced the market can only go higher. And by most measurements it is at levels at least as high and even higher, than at previous significant market tops, including that of October, 2007.
Meanwhile, the Fed is holding the interest rates it controls, the Fed Funds Rate and the U.S. Prime Rate, at record low levels. But interest rates that are more under the control of markets have been rising. That includes bond yields as noted above, and mortgage rates, the latter now back above 5% and at their highest level since last May. Markets don’t like rising rates, as can be seen by the declines in the markets of China, India, and Brazil, where their central banks are raising rates to ward off rising inflation.
Since it has had no normal pullbacks or corrections to work off excesses, the major U.S. market indexes, like the Dow, S&P 500, and Nasdaq, are very overbought above their 200-day moving averages, to a degree that almost always result in a decline sufficient to alleviate the overbought condition, and usually down far enough to retest the technical support at those moving averages. Such a normal pullback from current levels before the bull market resumes would amount to about 12% for the S&P 500.
But what about the confidence that Fed Chairman Bernanke has the magic power to hold the market up even if large institutions and hedge funds begin to sell to take profits (even though he had no such power to prevent the two severe bear markets of the last decade).
The most widespread criticism of Fed Chairman Bernanke has been that the Fed’s continuing easy money policy will create asset bubbles. So at this point in the economic recovery he would probably welcome a stock market pullback of at least enough to alleviate the bubbly look of its current overbought condition.
But so far, it’s not happening.