Higher and higher: Stocks but not the economy


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Last Updated at 17:32 ET

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If only it were economic growth. Instead, it's stock markets that have either hit all-time highs or are very close. Just look at the dizzying heights hit by the US S&P 500 and Dow Jones, as well as the UK's 100 share index, Germany's DAX and Japan's Nikkei.

The contrast with these slowly recovering economies is startling. The rest of the world isn't racing ahead either, as China grows at the slowest pace since the Asian financial crisis and countries like South Korea are using fiscal stimulus to help its economy along.

It's hard to see robust sources of demand that could underpin the rally in stocks. Some of it, of course, will be due to companies doing well.

But it is an awfully strong rise in stock prices, even beyond the levels of the early dot.com bubble of the early 2000s, which, we recall, subsequently burst.

That's why many are asking: what's driving the boom and is it a bubble?

Search for yields

Attention has turned to whether cheap cash is fuelling the stock rally.

Central banks like the Fed, the Bank of England, and the Bank of Japan have undertaken quantitative easing (QE).

They have increased the amount of cash in the economy, while holding rates at zero or nearly zero.

It is hard to know how much of the market's rise is due to cheap cash.

One gauge is the amount of stocks bought on margin, or using borrowed money. That has risen in the US to somewhat uncomfortable levels.

Plus, the low returns or yields on government bonds and the elevated (and even falling) prices of commodities don't make for attractive investments.

Real estate is still recovering in the US and the UK, though gaining in places like Germany.

And putting money in the bank isn't really going to earn very much.

Stock markets look like the place where investors are piling in. In Japan, the Nikkei has risen about 45% since the large-scale stimulus known as Abenomics was mooted by the new PM last autumn.

That's about double the rally of a so-called bull market, usually seen as a rise of 20%.

But will it benefit the economy - the aim of these QE policies?

Helping Main Street?

Central bankers like Fed Chairman Ben Bernanke say that their aim is to help Main Street and not Wall Street. It may well be what they intended to do.

As more than half of American households own stocks, a rising stock market could make them feel wealthier. It could help their sentiment while they watch their key asset, their homes, recover slowly in value.

In other words, a rising market stabilises their estimated wealth. Think of it this way, your house may be worth $10,000 (£6,600) less, but your stocks are worth $10,000 more.

At least that's the theory.

Of course, the other half don't own stocks. Stock ownership is also skewed in that wealthier households are more likely to own shares. What is termed the "positive wealth effect" may not be felt widely.

Plus, most of the stock market is owned by institutions, such as pension funds. For instance, direct ownership of stocks by US households has fallen from over 90% of the market in the 1950s to less than a third. It is a similar pattern in the UK and Japan.

Those who have invested in pension funds will become beneficiaries in due course. But that's a little remote in terms of households hoping to benefit now from a rise in the market.

Eventually, companies may invest more in the economy or pay higher dividends. They, though, may also be wary of acting on possibly inflated share prices if consumers don't look too robust.

This is perhaps why there is such a stark contrast between the stock market and the economy. At least the US and Germany have recovered to their pre-crisis levels of output; the British and Japanese economies have not.

Low rates help in other ways, such as keeping debt manageable while the economy recovers.

But are these policies also storing up trouble?

The next bubble?

There's a wariness that the policies used to address the last bubble could lead to the next one. Cue those who think that the post-dot.com bubble bust was supported for too long by low interest rates, which then led to the housing bubble and the 2008 financial crisis.

Now, as QE is used to address the bursting of the US housing bubble, stocks are up again. It's unsurprising that some are worried that history may be repeating itself.

Linda Yueh Article written by Linda Yueh Linda Yueh Chief business correspondent

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  • rate this

    Comment number 64.

    Humbug.. "and putting money into the bank isn't going to earn very much either." true, but putting money on the banks will generate a bob or two. 5 years for sorting their houses out & now with confidence for generating their own capital, hopefully no more hidden toxic bombs.
    Markets on a high but not driven by over inflated egos; previously dotcoms, house surges or cowboy bank managers

  • rate this

    Comment number 63.

    Not much with which to disagree there, Linda.

    Just one additional point: it's not just appreciation which makes stock attractive, Dividends shame interest rates on most cash investments.

  • rate this

    Comment number 62.

    61 Not the newspapers I've read. They are advising investors that they should stay out as they have missed the boat.
    If Joe Public gets his timing wrong it's his responsibility and he should invest elsewhere and get 0.5% interest.
    It's becoming increasingly fashionable to blame others for one's mistakes.

  • rate this

    Comment number 61.

    Another case of newspapers and websites telling punters that the markets are reaching an all time high. Joe public piles in, the stocks go up because of demand. Two weeks later, the wise guys cash in, and Joe Public sees his investment plummet. Another case of taking savings from the less rich and lining the pockets of the smug. I predict the markets will plummet soon....

  • rate this

    Comment number 60.

    Many a times I posted this in BBC. Yet inquiring persists. Here it is in gist.
    The stock markets are rich men’s game, no different from race horses, casinos and what else, which rich gamblers love to punt.
    The pension funds are punting with other peoples’ money, with profit-sharing & no loss-bearing for the pro-gamblers. Check out their fees for proof. Now git over it.


Comments 5 of 64


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