Why are stocks on all time highs?

Market Review

Despite being very much aware of the payrolls number on Friday and market conditions normally being relatively muted ahead of this with a few exceptions, the volume and movement on Monday was half way decent and this made us hopeful. Turns out it was all in vein. Market conditions yesterday saw little chance for any strategy traders to enter the market due to either a) the lack of pullbacks or b) the tight ranges. We chose directions well, but there was a massive lack of news and overall we were grinding higher/lower/sideways depending on the market. On the 2 hour chart on the e-mini S&P we can actually not spot a proper red candle for the day. Data of note yesterday was European Unemployment rate coming in marginally better than expected, as well as the ISM Manufacturing PMI number which missed on the headline by 0.5, though still being the best number in three months.

Today's Fundamental View

The headline on the FT.com this morning correctly states that global stocks hit post-crisis highs. It does however, fail to implement the word “again”. With stocks on the highs, lets play the devils advocate and take the opposite side of the argument even though we have understanding as to why they may be up here; they should not be. For starters, a couple of years ago we were questioning the very existence of the Euro, now some are even calling it a safe haven currency - Completely ignorant to the crisis that was, or if you ask 26.03% of the Spanish population, or 56.1% of the Spanish youth – the crisis is very much still here. It is still impossible for many to find work. “Chinese hard landing” was on the front cover of the newspapers for what feels like an eternity, only over a year ago, and now that China is slowing and they are likely to miss their GDP growth target this does not seem like a big deal anymore. Last year we were discussing bailouts of Greece, and the election in Germany put a small lid on news and discussions around another package, this due to everyone being aware of the fact that Angela Merkel needed to stay in power in order for the bailout to happen. Traders new it. Investors knew it. The newspapers knew it. The people knew as well, but peoples’ attention span is limited to newspaper headlines, and as the media got in line with the EU electorate the people were at best only partially manipulated in agreeing to a rescue package. The US has artificially been keeping the wheels in its economy turning by using stimulus, and there has been a slowdown as we are tapering which may or may not be due to seasonal effects. Uncertainty. Inflation is not exactly going up either, which again may or may not be a good sign as it does leave room for delaying the tightening cycle. On top of this, the west had the biggest confrontation (arguably still ongoing) with Russia since the cold war over Ukraine… but still – stocks are on All Time Highs. Why? S&P and other equity indices are currently not always a good reflection of real conditions. Reasons being it does not reflect conditions for anyone but the rich. We may just look at Fortune 500. A better reflection may just be a list of 500 completely random people or companies of all sizes and measure their financial state now compared to 5 and 10 years ago. It is important to remember this when trading, the difference between the real economic conditions and the assets you look at when you analyse the markets. This afternoon will see the release of ADP Employment change which is expected at +192k. This should serve as a good pre-cursor to Friday’s NFP number, and for this reason we may see a bit of volatility, though due to the proximity of 1900 handle in the S&P we believe it will have a smaller effect on the downside compared to the upside. Of other assets we believe we will see USD strength as well as US10Y weakening as we are bullish on the number. The crude oil analyst consensus is a build of +2.5M though we believe the number will be quite a bit more negative in the -4M area, and for this reason look for a decent upside in the commodity, while the components will be relatively in line.

Alternative View

Adverse comments from central bankers may adversely affect the markets, as will any developments in Ukraine.