Why are Stock Markets at New Highs? — Jill on Money [ Archive]

"Why are stock markets at new highs?" The easy answer is that there are more buyers than sellers. The more complicated answer is that the Dow and the S&P 500 reached new all time highs last week, as investors shrugged off post-Brexit concerns and refocused on global central banks. In the case of the Bank of England, the Bank of Japan and the European Central Bank, the bet is that each will do something in the coming months to fight economic malaise. And in the US, the recent resurgent stock market is a result of investors’ belief that that the Federal Reserve will likely sit on its hands for the remainder of the year. Even if those assumptions are correct, the climate for investors is still riddled with danger. To earn anything approaching an acceptable return, many are turning back to risk assets, despite the bump in volatility seen over the past 18 months. In fact, since May 2015, when stocks previously saw new peaks, investors have endured two corrections (drops of 10 percent from recent peak) amid worries about slowing growth in China, plunging oil prices and fears over an emerging market debt crisis.

Those who gritted it out and stayed on course with their asset allocation, have done just fine. After dropping to 52-week lows in February of this year, the Dow is up a stellar 17 percent (and up 180 percent since the March 2009 nadir). But pity the market timers who sold at the various bottom points and then chased assets higher—they are likely licking their wounds and perhaps even sitting out this most recent leg higher.

There are also many investors who are on the sidelines because they see the world as a scary place. These folks likely stumbled upon the Economist Intelligence Unit’s updated list of Top Threats as a rationale for not feeling comfortable with any risk right now. Those top ten threats are:

China experiences a hard landing
Currency volatility and persistent commodity prices weakness culminates in an emerging markets corporate debt crisis
Donald Trump wins the US presidential election
Beset by external and internal pressures, the EU begins to fracture
"Grexit" is followed by a euro zone break-up
The rising threat of jihadi terrorism destabilizes the global economy
Global growth surges in 2017 as emerging markets rally
The UK votes to leave the EU
Chinese expansionism prompts a clash of arms in the South China Sea
A collapse in investment in the oil sector prompts a future oil price shock

My vote for number 11 on the list is “Corporate Share Buybacks halt”. As noted in the Wall Street Journal, “Among the most prominent drivers of the 2016 stock rally has been companies’ willingness to buy back shares. The strategy…drives up share prices and improves per-share earnings by reducing the number of shares outstanding. Some investors decry buybacks as financial engineering.”

The concept of companies buying back shares to drive prices higher is what Time business and economics columnist and author Rana Foroohar calls “financialization.” In her book “Makers and Takers: The Rise of Finance and the Fall of American Business,” Faroohar says that buybacks are a type of financial engineering that can juice short-term profits, thereby enriching shareholders. Unfortunately, waving a financial magic wand over a company’s balance sheet does nothing to serve the real economy, something that would occur by a company using its capital to invest in long-term growth.

Financial shenanigans may push the stock market higher for the foreseeable future, but they are unlikely to create a sustainable economic model that will produce results over the next several years.

MARKETS:

DJIA: 18,516, up 2% on week, up 6.3% YTD
S&P 500: 2161, up 1.5% on week, up 5.7% YTD
NASDAQ: 5029, up 1.5% on week, up 0.5% YTD
Russell 2000: 1205, up 2.4% on week, up 6.1% YTD
10-Year Treasury yield: 1.547%, (from 1.366% a week ago)
British Pound/USD: $1.3214 (from $1.295)
August Crude: $46.02, up 1.4% on week
August Gold: at $1,327.40, down 2.3% on week
AAA Nat'l avg. for gallon of reg. gas: $2.22 (from $2.24 wk ago, $2.77 a year ago)

THE WEEK AHEAD:

Mon 7/18:

Bank of America, Hasbro, IBM, Netflix, Yahoo!

10:00 Housing Market Index

Tues 7/19:

Discover, Goldman Sachs, Johnson & Johnson,, Microsoft, Philip Morris, UnitedHealth

8:30 Housing Starts

Weds 7/20:

Abbott Labs, American Express, eBay, Halliburton, Intel, Mattel, Morgan Stanley

Thursday 7/21:

ATT, Chipotle Mexican Grill, GM, Starbucks, Visa

8:30 Philadelphia Fed Business Outlook Survey

8:30 Chicago Fed National Activity Index

9:00 FHFA House Price Index

10:00 Existing Home Sales

10:00 Leading Indicators

Friday 7/22:

American Airlines, General Electric, Honeywell, Schlumberger

Saturday 7/23:

China hosts the G-20 meeting of finance ministers and central bankers.