The markets have been reaching new highs recently. The DJIA topped 14,000 last week and the FTSE has been comfortably above 6,000 since the beginning of January. Is this recent bullish market a sign of better things to come, or should we be cautious heading into Q2?
There has been a lot of momentum in the markets recently, the Euro has strengthened for the second week against the dollar, something not seen since pre-crisis; it has also seen it’s largest strengthening against the Yen since the Euro was conceived in 1999. Showing increased optimism in the Eurozone economy and it’s prospects of a recovery.
Furthermore in the United States treasury yields on 10-yr benchmark bonds are rising, indicating that traders are taking their money out of ‘safe-haven’ assets and beginning to dip into the equity market again.
- PMI results came out last week, with the United States in expansionary at ~56 and the UK also above the threshold of 50 at 50.8. Almost all major European countries beat estimates for their PMI, although Germany and Spain remain below 50 at 49.8 and 46.1 respectively. PMI is an indication of managerial confidence and growth of businesses, it records orders from managers (such as supply orders) indicating whether a business is expanding or not; above 50 is considered expansionary and below is contractionary.
Earnings reports over January have generally been positive, BT-A recently announced earnings above analyst’s estimates, resulting in +6% share price; other successes have been Exxon-mobil, Amazon and Goldman Sachs. There have been some duller points, such as Apple failing to meet estimates, but poor earnings have received less attention and the market feels more bullish at current.
- Should we be concerned of a fall in the stockmarket?
Earlier this week it was announced that US GDP has fallen by -0.1%, it’s first fall outside a recession. Analysts had estimated a +1.1% growth in GDP. The main factors around this drop in GDP have been spending cuts, most notably the $50bn reduction in defense spending.
Although on the outside it seems negative, the GDP figure of -0.1% could, dare I say it, be positive for the Stock Market. It’s indicating a reduction in government spending, which should help national debt in the long run, and furthermore a study by Elroy Dimson, Paul Marsh and Mike Staunton shows that GDP growth and share price performance tend not to be correlated (pdf). It can also be argued that had GDP risen there could be scope for less Federal Reserve stimulus, that in turn would lead to a reduction in ‘super-easy money’ (ft.com) and be bad for share prices.
- Debt Ceiling
We must be reminded that the debt ceiling date is coming up very soon and the results of possible large-scale spending cuts, tax rises and uncertainty about whether a solution will be agreed on by congress and senate will create a degree of turmoil in the markets. If the United States have seen -0.1% gdp growth due largely by spending cuts in defense, it is possible they will see a much larger contraction should they pass higher spending cuts and tax rises.
Momentum is strong in the markets at the moment, earnings are exceeding estimates and there is a bullish feel. But we should be aware of the debt ceiling coming up, possibilities that the market will thin-out (2011 had a similar Q1 and struggled for the rest of the year) and that the euro-crisis might re-emerge.
Bloomberg: “What was happening the last time the DOW hit 14k?” [VIDEO] Link