Birmingham bull

In sport, there are winners and losers.  In the world of stock markets, and over the last few days, it seems there have only been winners, as records tumble faster than you say, ‘on your marks, get set, go!’  But can it last? Will such rapid growth end in tears – will the fast sprinting stock markets pull their hamstrings?

 

It happened in the UK, it happened in Germany, it happened in the US.  In fact, it is happening in lots of places.

The FTSE 100 has now passed 7,500, and for the first time ever.  This index tracks larger companies, many of which are multinationals, so it is not a great bellwether of the UK economy.  The FTSE 250 has a more UK focus, far more of its constituents target the UK economy.    This index closed at a new all time, with a reading of 19,876 on May 11th.

In the US, the S&P 500 passed 2,400 for the first time ever on May 16th, the NASDAQ Composite, which has a high technology emphasis, closed at 6,160 on May 16th, an all-time high, and the Russell 2,000, which tracks smaller US companies closed at 1,394 – you guessed, it, that is an all-time high, too.

In Germany, the DAX is also trading in unchartered waters –12,807 on May 15th, while in France, the CAC 40 closed at 5,416 on May 16th – it had never been there before.

The MSCI International World Index has also hit a new record.

But it is not just stock markets in the developed world that are booming, the MSCI Emerging Market Index has also closed at a record.

Meanwhile, the VIX, a measure of volatility in the S&P 500, also known as the fear index, has been close to falling to an all-time low, meaning that the markets are close to be being as unafraid as they have ever been.

And yet the so-called Doomsday Clock – which is meant to reflect the odds of some kind of apocalypse, stands at two and half minutes to midnight. The Science and Security Board said that: “The probability of global catastrophe is very high, and the actions needed to reduce the risks of disaster must be taken very soon.”

Is it that the markets don’t worry about things like that?

So why are the markets so high? The recent announcement by China’s Xi Jinping to spend $134 billion on infrastructure over 65 countries helped. In many ways, this is just what the global economy needs.

The markets loved the result of the French election.

The oil price seems to be trading in a corridor of between $45 and $55 a barrel – roughly half the price from three years or so ago.  In theory, a fall in the oil price supports oil consumers but hits oil producers, and thus has a neutral effect on the global economy – it merely redistributes. In practice, oil consuming countries tend to have a lower savings ratio, so cheaper oil should lead to higher aggregate demand.

The FTSE 100 is benefiting from the cheaper pound, as many of its members’ trade in foreign currencies but shares are traded in sterling –  but this does not explain booming stock markets elsewhere.

But the markets’ attitude to the US is confusing.

There is still something of a so-called Trump trade, markets are buying in anticipation of tax cuts. Yet Mr Trump does seem to be in a spot of bother at the moment – who knows whether he will be impeached, but the problems besetting Trump seem to be turning European voters off far right politicians.  So, the markets are actually celebrating in anticipation of Trump achieving his objectives and not achieving his objectives, all at the same time.  Individuals can hedge like that, but the global stock market can’t.

The global economy is in quite good shape at the moment, the economic cycle seems to be turning in a favourable direction.

For all the talk of whether the markets are too exuberant and a crash is close, maybe the reality is that they are where they are because that is what stock markets are supposed to do.

They are supposed to rise over time.  The S&P 500 was trading around 1,500 in the year 2000, now it is up to 2,400, that sounds about right.  The FTSE 100 closed at 6,930 on December 30th 1999, now it is over 7,500, that is actually quite a poor performance.  Maybe, things have just got back to normal.