An index tracking global stock markets has hit a new all-time high. Should we be cracking open the Bolly in anticipation of the good times, or should we be rushing for the economic equivalent of a bomb shelter, in fear of a bubble?What goes up, must come down! Shares are surging. But does the law of gravity really apply?
The FTSE All World Index has hit a new all-time high, the first time this has happened since 2015, but this does rather seem to fit into a wider narrative of economic optimism.
In the UK, the FTSE 100 ended 2016 with a series of successive record highs, and it began 2017 with a similar experience. It has now been over a month since the index finished the day with a new record, but last night it was only 35 points or so short of the record, it only needs one day of very moderate rises to move into record territory once again.
In the US, stocks have been hitting highs with such regularity that it has ceased to be news.
But the good news is not restricted to the US and UK. The Euro Stoxx 600 – which as the name suggests, tracks top shares in the euro area – has just passed its highest level since 2015. In Asia, Hong Kong’s Hang Seng index is hovering around an 18-month high, although it is still some 20 per cent short of the 2007 record. In Japan, the Nikkei 225 is at a 12-month high. The index has increased by around 3,000 points in the last ten months or so. If it were to rise by another 1,000, or so, it too would be at an all-time high.
Some immediately say that it must be a bubble.
US stocks do indeed look expensive. One method for telling is to look at the CAPE – cyclically adjusted price earnings ratio – which looks at company earnings over the previous ten years, and compares with valuation. By this measure, US stocks are almost as overvalued as they were in 2008 and 2000, on each occasion a massive stock market crash followed.
Others say that on this occasion, the CAPE index is misleading, that the last ten years have been an exceptionally poor period for company earnings. They reckon that earnings are set to surge, rendering the CAPE into irrelevance.
However, stocks in Europe and Japan, and to lesser extent UK, are not exceptionally high, relative to earnings and by past measures.
Leading the charge has been bank stocks – although the fact that Apple hit a new high recently did no harm.
Banks are doing well for multiple reasons. For one thing, the hope of higher interest rates, which provide banks with the opportunity for higher margins on their lending, is doing no harm. US banks are partly doing well in anticipation of President Trump reining back on regulation, but frankly US banks were looking good anyway.
In Europe, the evidence from surveys, such as purchasing managers’ indexes, has been encouraging. Even Japan is showing signs of promise, with some economists arguing that the reforms of Japan’s prime minister, Shinzo Abe, with his so-called three arrows, are beginning to hit their target.
Bear this in mind.
History tells us that economies recovering from recession tend to enjoy above average growth. The deeper recession the stronger the recovery.
Sometimes there are big time lags, however. The US suffered a depression in the 1930s, but boomed in the 1950s soon growing to the size that it would have been had the pre-1929 growth rate continued into the 1930s and 1940s.
This time around, the downturn was also very deep, but the recovery has been lacklustre at best.
Maybe this is because there has been a permanent change, and economies in the west will never grow like they used to again. If this is right, the stock markets are lying to us.
Or maybe, the recovery from downturn has just been delayed, and that at last the pattern of history will re-assert itself.
Stock market bears laugh when people try to justify recent performance, by saying it will end in tears, it always does, and sarcastically respond to bulls saying “oh I see, this time it is different.”
But a stock market bull could easily respond by saying, but actually, today’s stock market highs seem to be telling a story that is consistent with the lesson of history from the last 100 years or so. They might say: to argue that stocks are giving a misleading picture, is in fact to argue that this time it is different.