SO it’s another week and the bull market for stocks remains intact. The S&P 500 has breached the 1,400 level for the first time since June 2008, while in Europe equities are at fresh year highs, with Germany’s Dax up over 21 per cent. The FTSE is an underperformer, but still up an acceptable seven per cent.
While some caution we must be close to a top, others believe we’re in a new trend, one that’s now combined with a powerful move out of government debt. It’s a view supported by Bull and Bear Partners chief executive Jack Bouroudjian. “These are large strategic asset allocations… that is why I am a firm believer we are entering a cyclical bull right now,” he said.
In the US Bouroudjian is calling for an expansion of earnings multiples to sustain equities – this after a big sell-off in bonds that’s dragged 10-year gilt yields off post war lows to three-month highs and last week caused US treasury yields to lose nearly 30 basis points in three days.
Investors have moved from worrying about financial stability to hoping for growth. We are not talking about Chinese, Brazilian or other emerging market – or even European – growth. Asset price moves purely reflect a view that America might finally be moving into a self-sustaining phase.
You got the sense of the optimism from the reaction to the US stress tests. The headlines could have focused on the fact that four banks failed, but instead there was much fanfare that 15 passed. What we have is the beginning of a belief that a more “normalised” recovery is building.
As Lloyds’ Charles Diebel says: “After all the fire fighting and crisis management of the past couple of years, it is an attractive concept. However, we would caution against getting too carried away with such ‘this time it’s for real’ emotions.” He points out we’re still in a situation of mass liquidity provision and policy maker support; the taps remain wide open. The outlook seems more benign. But investors must ask if the policy settings are flattering and if strength in the macro outlook is overstated.
One investor who doesn’t buy it is M2 Capital Partners Irakli Menabde. He says the sovereign debt crisis is not over and downside risks for both equity and commodity markets remain because of unemployment and inflation. His strategy is to go long on undervalued precious metals equities and short on overvalued global equities. But of course that doesn’t mean in the short run, the bulls aren’t going to get up an even bigger head of steam.
Ross Westgate co-hosts Worldwide Exchange daily from London and anchors Strictly Money on CNBC