Why the Global Bull Market Keeps on Running
That dull roar you hear is the sound of a global stampede into stocks--a movement that surged with new power last week.
On Friday, share prices hit record highs on four continents. Though many foreign markets have been rallying all year, the buying last week was stunning in scope and urgency.
The Hong Kong market, for example, leaped 9.5% for the week. Singapore, Kuala Lumpur (Malaysia), Bangkok and Mexico City stocks all rose 4% or more, as measured by local indexes.
In Europe, new highs were seen in Stockholm, Frankfurt, London and Zurich, among other places.
On Wall Street, the Standard & Poor’s 500 index jumped 2% for the week, and trading volume ballooned. Trading on the Nasdaq market of mostly smaller stocks hit a record 415 million shares last Wednesday.
To put that Nasdaq number in perspective, 288 million shares traded on Oct. 21, 1987, Nasdaq’s heaviest day during the week of that year’s market crash.
In most world markets, the forces driving this bull move are similar. Low or falling interest rates, for example, are virtually universal worldwide, and that trend shows no signs of reversing.
In the United States, the 30-year Treasury bond yield fell to 5.79% Friday, lowest in more than 20 years, after the government said consumer prices didn’t rise at all in September.
Another trend that is increasingly universal is business cost-cutting and downsizing, promising higher corporate efficiency and higher earnings. In Germany, Mercedes-Benz said last weekend that it will slash 13% of the 2,750 jobs at its Hamburg plant, the latest in a wave of unprecedented layoffs among German industrial giants.
While devastating for the workers who lose their jobs, the cold reality is that the market has no social conscience: If earnings are going up--whatever the reason--stocks are usually bound to follow.
Meanwhile, in many Southeast Asian and Latin American markets, share prices are surging for reasons all their own. China’s economic ascension has re-energized nearly every stock market in Southeast Asia; and in Latin America, investors are responding to the increasing stability of the region’s democratic governments, the decline of inflation and the boom in privatization of state businesses.
Even so, when markets rise 4% a week, it’s reasonable to question whether we’re entering a speculative blow-off phase. Analysts who study patterns of stock prices note that market cycles tend to run three to four years. Most world markets peaked in 1987, then again in 1990. That cycle suggests we’re due.
Moreover, the 3-month-old rush of American investors into foreign stocks (via mutual funds), while a constructive move for those buyers in the long run, also is reminiscent of 1986-87, says fund-tracker Michael Lipper at Lipper Analytical Services in New York.
“Around the world, including in the U.S., when investors believe their home markets lack sufficient value they invest beyond their borders,” Lipper notes. “In 1986-87, as well as in other later stages of bull markets, there was a surge of interest in investing outside of the U.S.”
Indeed, over the past two weeks, analysts have mostly credited an inflow of foreign money for the stock market gains in Hong Kong, Mexico City and Bangkok, among others. It’s important to note that these remain tiny markets, by U.S. standards. It doesn’t take much money to move them up--or down.
Is this, then, another worldwide market bubble ready to burst? Doubtful, argues Steven Nagourney, global stock strategist at Lehman Bros. in New York.
One year ago, he correctly forecast that long-term interest rates in the United States would decline sharply, even as many Wall Streeters argued that there was little likelihood they’d see 6% yields on 30-year Treasury bonds again in their lifetimes.
What Nagourney saw a year ago--and what he believes is still unfolding--is a mammoth global drive toward efficiency. It began with the restructurings of American corporations, has since spread to European and Japanese companies, and is equally visible in developing nations through their mass privatizations of bloated state enterprises (phone, oil, etc.).
As business efficiency increases, Nagourney notes, it keeps prices down and helps lower inflation worldwide, which in turn allows interest rates to continue falling.
And falling rates, in turn, increase the stock market’s attraction, allowing companies to raise record sums through equity sales. The proceeds then are put to work in building the business, opening new markets or paying off debt.
What shut off the global bull market in 1987, Nagourney notes, was rising interest rates, in part the result of misguided central bank policies. Today, in virtually all economies, interest rates are either level or falling, he says. That removes one major potential threat to stocks’ upward bias.
Another huge plus today not present in 1987, Nagourney says, is the opening of capital markets worldwide to outside investment. China is perhaps the most dramatic example, but events in Latin America since 1987 have been no less significant.
It would have been hard to imagine, in 1987, that Argentina’s national oil company YPF would be handed over to private investors; ditto Mexico’s banks.
As stock and bond markets blossom in developing nations, the benefits to the global economy are huge, Nagourney says. By definition, open markets allow capital to find its highest and best use.
Excesses still occur in free markets, of course (the overdevelopment of U.S. real estate in the 1980s is a prime example), but by and large unfettered capital markets offer the greatest probability that money will be available to finance the businesses that can make the most with it.
In an environment like this, Nagourney says, it would be illogical if stocks weren’t going up.
If there’s a bogyman out there, he says, it is any event that would restrict the worldwide movement of money and ideas. Therefore, the failure of Congress to ratify the North American Free Trade Agreement, or a total breakdown of the global GATT (General Agreement on Tariffs and Trade) talks, could be bearish for markets, Nagourney says.
But for now, he believes, the politicians are smart enough to understand that the movement toward even freer trade is crucial for the world’s economic health.
If he’s right, the global bull may be barely a calf in size. If he’s wrong, though, this beast has two hoofs in the slaughterhouse door.
Record Highs, All Around Around the world, many key stock indexes ended last week at record highs. A sampling:
Fri. Week’s 1993 Country/index close gain gain Hong Kong/Hang Seng 8,763.98 +9.5% +59.0% Malaysia/Composite 927.46 +4.8% +44.0% Singapore/Straits Times 2,112.95 +4.0% +38.6% Germany/DAX 30 2,015.03 +0.5% +30.4% Thailand/SET 1,154.95 +5.1% +29.3% Canada/TSE 300 4,182.58 +2.8% +24.8% Belgium/BEL 20 1,370.86 +1.8% +21.6% Mexico/Bolsa 1,962.87 +5.2% +11.6% Britain/FTSE 100 3,120.80 +0.4% +9.6% U.S./S&P; 500 469.50 +2.0% +7.8%
Source: Reuters
