A favorite market saying is “The market can remain irrational far longer than you can remain liquid.” A corollary might be equity levels need not be tied to economic reality. The emblematic American Dow Jones Industrial Average has more than tripled in value since its March 2009 bottom, 220 percent in eight years, a very respectable 27 percent per annum. Those same eight years saw some of the weakest U.S. economic growth of the post-war era.
If the stock market is a method of discounting future earnings and economic growth something is surely amiss. One theory has been that global equity levels have been promoted by the vast experiment with zero rates by the world’s leading central banks with the implication that once the liquidity is withdrawn equities will fall. But that has not proven to be true. The Federal Reserve has just raised rates for the third time in as many years and is positing at least two more increases by December. Economic growth has declined from 3.2 percent annualized in the third quarter of last year to 1.9 percent in the fourth and is running at just 0.9 percent this quarter according to the Atlanta Fed GDPNow estimate, but the Dow is within 200 points of its all-time high. If the Trump administration is successful in boosting U.S. economic growth to 3.0 percent or more equities will continue higher, regardless of the disconnect of the past eight years. That is the inescapable message of the 17 percent post-election surge. Does that mean that when the correction does come it will drive the equities back to a level commensurate with the pace of economic expansion of the last decade?
Join us for an inquiry to the rational (ostensibly) world of global equities.