The US stock market has held up well so far and will continue do so in 2008 As a result of the belief that the “worst is behind us”, and for
other reasons I shall explain below, market participants have remained, while not exuberantly bullish, so at least complacent and optimistic about an economic and corporate profit recovery in the second half of the year and in 2009. According to a recent survey by Barron’s, institutional investors are heavily leaning toward the positive side. 50% of the respondents were either “very bullish” (7%) or “bullish” (43%) about the US stock market whereas only 12% of respondents were “bearish” (nobody was “very bearish”).
There were another two interesting aspects regarding the “Spring 2008 Big Money Poll Results.” Institutional investors tended to be positive about equities (87% of respondents indicated they would be buyers of equities in the next three to six months), very positive about the US dollar and “very bearish” about US Treasuries, and “bearish” about real estate, gold, and oil. Moreover, institutional investors’ favourite industries over the next six to 12 months were “Financial” and “Technology”.
To some extend I can understand why US institutions are positive about US equities and the dollar, and bearish about treasuries. Because of the US dollar’s steep decline since 2001 US equities are in Euro terms still 50% below the peak in 1999 (in Euro terms). So, in Euro terms, US equities are relatively inexpensive. In addition, because US equities sold off less than foreign markets since October 2007 they have begun to out-perform foreign markets.
Then, as Walter Bagehot (who edited the Economist for 17 years) already remarked in the 19th century, “John Bull can stand many things, but he cannot stand 2%.” So, I have some sympathy with the positive stance of institutional investors. However, I find it difficult to reconcile financial institutions very negative stance toward Treasuries (only 3.6% of respondents were bullish versus 62.2% who were bearish) and at the same time their positive stance toward the economy and equities. The reason I think there is an inconsistency here is that if interest rates increase (Treasuries decline in value) the highly leveraged consumer and with him the entire economy are unlikely to recover.
Aside from artificially low interest rates on US short dated Treasuries, excessive optimism regarding an economic and profit recovery in the second half of 2008 and in 2009, and dollar weakness, there are two more reasons why US equities have held up well in face of deteriorating economic news. “Extraordinary monetary measures” by the Fed, which drove real short-term interest rates into negative territory, have propelled commodity prices higher (especially energy and agricultural commodities) and boosted the shares of energy, industrial and material stocks, which make up 14%, 12% and 4% of the S&P weight respectively, far above their previous highs in 2007.
In addition, since households have to spend an increasing portion of their income on non-discretionary items (which include necessities such as food and energy), consumer staple companies, which make up 11% of the S&P 500, have also been strong.
Considering all the above mentioned factors, I hope our readers will understand why US stocks have held up so well – at least so far.
For Complete IIPM Article, Click on IIPM Article
Source : IIPM Editorial, 2008
other reasons I shall explain below, market participants have remained, while not exuberantly bullish, so at least complacent and optimistic about an economic and corporate profit recovery in the second half of the year and in 2009. According to a recent survey by Barron’s, institutional investors are heavily leaning toward the positive side. 50% of the respondents were either “very bullish” (7%) or “bullish” (43%) about the US stock market whereas only 12% of respondents were “bearish” (nobody was “very bearish”).There were another two interesting aspects regarding the “Spring 2008 Big Money Poll Results.” Institutional investors tended to be positive about equities (87% of respondents indicated they would be buyers of equities in the next three to six months), very positive about the US dollar and “very bearish” about US Treasuries, and “bearish” about real estate, gold, and oil. Moreover, institutional investors’ favourite industries over the next six to 12 months were “Financial” and “Technology”.
To some extend I can understand why US institutions are positive about US equities and the dollar, and bearish about treasuries. Because of the US dollar’s steep decline since 2001 US equities are in Euro terms still 50% below the peak in 1999 (in Euro terms). So, in Euro terms, US equities are relatively inexpensive. In addition, because US equities sold off less than foreign markets since October 2007 they have begun to out-perform foreign markets.
Then, as Walter Bagehot (who edited the Economist for 17 years) already remarked in the 19th century, “John Bull can stand many things, but he cannot stand 2%.” So, I have some sympathy with the positive stance of institutional investors. However, I find it difficult to reconcile financial institutions very negative stance toward Treasuries (only 3.6% of respondents were bullish versus 62.2% who were bearish) and at the same time their positive stance toward the economy and equities. The reason I think there is an inconsistency here is that if interest rates increase (Treasuries decline in value) the highly leveraged consumer and with him the entire economy are unlikely to recover.
Aside from artificially low interest rates on US short dated Treasuries, excessive optimism regarding an economic and profit recovery in the second half of 2008 and in 2009, and dollar weakness, there are two more reasons why US equities have held up well in face of deteriorating economic news. “Extraordinary monetary measures” by the Fed, which drove real short-term interest rates into negative territory, have propelled commodity prices higher (especially energy and agricultural commodities) and boosted the shares of energy, industrial and material stocks, which make up 14%, 12% and 4% of the S&P weight respectively, far above their previous highs in 2007.
In addition, since households have to spend an increasing portion of their income on non-discretionary items (which include necessities such as food and energy), consumer staple companies, which make up 11% of the S&P 500, have also been strong.
Considering all the above mentioned factors, I hope our readers will understand why US stocks have held up so well – at least so far.
For Complete IIPM Article, Click on IIPM Article
Source : IIPM Editorial, 2008
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