Worldwide, Stock Markets Send a Bullish Message
If the stock market is supposed to be a barometer of the economy’s trend, what is the latest rally telling us?
We’re not talking merely about the Dow Jones industrial average’s flirtation with the 10,000 mark, which saw the index close Friday at 9,876.35, off 21.09 points for the day but still up 1.4% for the week.
In recent weeks there has been a sharp turn in equity markets worldwide. People are buying stocks aggressively in markets as disparate as Australia, Japan, Mexico, Britain and India.
The global rally has been so pronounced, in fact, that nine of the 13 categories of foreign stock mutual funds tracked by Lipper Inc. now show gains, on average, year-to-date.
By contrast, all but two of those categories were in negative territory for the year as recently as two weeks ago.
Of course, markets worldwide were up sharply in the fourth quarter as well, but that was a rebound from the drastic sell-off of August and September.
That fourth-quarter rally faltered in January as Brazil devalued its currency, triggering fears of yet another global market meltdown a la what happened after Russia’s devaluation and economic plunge last August.
But Brazil, as it turns out, is no Russia. In fact, one irony of the Brazilian devaluation is that it actually fueled a spectacular rally in Brazilian stocks: The Bovespa share index of the Sao Paulo market has soared 89%, to 9,574, since the Jan. 14 devaluation.
Adjusted for the currency’s loss of value, the Brazilian market is still down 11% for the year in dollar terms. But it’s certainly better that buyers have been willing to jump into that market post-devaluation than not.
(Note that after Mexico devalued in December 1994, the Mexican stock market continued to sink until spring of 1995.)
Now, one very simple explanation for what’s happening in global stock markets could be that speculators--as opposed to investors--are running rampant. In other words, “hot money” sees a change in a market’s trend and rushes in to play the new trend only for as long as it lasts.
But it’s worth remembering that short-term speculators usually precede long-term investors into dicey markets. Somebody has to go first, and that generally means those willing to take high risks.
Some Wall Street pros believe there is, in fact, an economic message in markets’ recent moves: a growing belief that the global economy is finally turning away from the specter of deflation/depression that has haunted it since the Asian economic crisis began in mid-1997.
“It’s a winding down of the deflation scare,” said David Malpass, economist at brokerage Bear Stearns & Co. in New York.
If so, that is in no small part a function of the U.S. economy’s amazing strength, as American consumers have continued to spend money as if the fate of the world depended on it--which is pretty close to the truth.
“The broad wings of the U.S. economic expansion are helping to lift battered economies across the globe,” said John R. Williams, economist at Bankers Trust in New York.
But many foreign stock markets also have found their own good reasons to rally in recent weeks:
* The Mexican market has rocketed 18.6% since Dec. 31, bolstered in part by its close ties to the surging U.S. economy and also by expectations that crude oil prices will rise--or at least stabilize--if major oil exporters follow through with their new plan to rein in production.
Although U.S. consumers won’t be happy about the effect of higher oil prices at the gas pump, oil’s rebound to $14.49 a barrel as of Friday--up 27% from $11.37 a barrel on Feb. 16--could help keep many oil-exporting economies (including Mexico) from worsening.
Higher oil prices also would help those economies afford more U.S. exports, analysts note.
(And oil remains relatively cheap: The price of a barrel still is down 14% from a year ago.)
* Optimism that prices for oil and other commodities might at least be bottoming after their plunge of the last two years helped drive Australia’s main stock index to a record high Friday. It’s up 5.3% year-to-date, matching the gain of the U.S. Standard & Poor’s 500 index.
Australia’s market is dominated by mining companies and other natural resources firms, so it is highly sensitive to commodity swings.
* Germany’s main stock index zoomed 5.3% on Friday, pushing it back into positive territory year-to-date, after leftist Oskar Lafontaine resigned as finance minister.
Lafontaine championed tax reform that would have increased the tax burden on many German firms. And he all but demanded that the new European Central Bank cut interest rates to stimulate growth.
European stock markets might otherwise have endorsed Lafontaine’s rate cut idea, but many investors also felt he was a threat to the central bank’s independence and to the long-term health of German companies.
“Arguably, Lafontaine’s policy approach restrained economic growth by not offering the private sector a stronger incentive to grow and spend,” said John Lonski, economist at Moody’s Investors Service in New York. “Forecasts of European economic growth for 1999 might soon be revised higher” with Lafontaine’s departure.
* Japan’s stock market has perhaps been the biggest surprise this year. The Nikkei-225 index is up 11.9% year-to-date, after falling 9.3% last year. Foreign money has poured into Japanese stocks in recent weeks on the hope that that economy is on the rebound.
That bet has been made several times in the 1990s, and it has consistently been a loser--as reflected in the fact that the Nikkei index still is down a stunning 60% from its late-1989 record high.
This time, many foreign investors are pinning their optimism on the Bank of Japan’s willingness to open the monetary flood gates, pumping massive liquidity into the banking system. If the banks finally begin to loosen credit for business and consumer borrowers, Japan’s domestic economy might indeed begin to revive.
But Bankers Trust economists, in a report late last week, argued that “the credit crunch [in Japan] remains severe, as commercial banks are resisting pressure to lower lending rates in favor of raising profit margins.”
That also was the criticism leveled at U.S. banks in the early 1990s, as they were recovering from the real estate collapse in many U.S. markets in the late 1980s. Once U.S. banks felt financially secure again, however, they began to lend with both hands.
Is that what the Japanese stock market’s rally is forecasting?
We know from history that stock markets aren’t necessarily good fortunetellers when it comes to economic trends. Remember when the U.S. market crashed in October 1987? The fear was that stocks were warning of a global depression. Instead, the U.S. economy boomed in 1988.
This time around, there’s no guarantee that rising stock markets mean the risk of deflation/depression has dissipated completely. As Bear Stearns’ Malpass notes, there is still “plentiful capacity” in industry worldwide, and as yet not enough demand for much of what is being produced.
But all things considered it’s better to have stock markets rising than falling if you’re trying to be optimistic about the future of the world economy.
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Tom Petruno can be reached by e-mail at tom.petruno@latimes.com.
Global Stock Rally
After a rough year for most stock markets in 1998, the majority of markets worldwide are rising so far this year in native-currency terms. U.S. investors in many markets, however, are being hurt by the dollar’s strength.
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Percentage change, Percentage change, in native in native currency currency Market/stock index 1998 YTD 1999 Brazil/Bovespa -33.5% +41.1% India/Sensex-30 -16.5 +21.2 Mexico/Bolsa IPC -24.3 +18.6 Japan/Nikkei-225 -9.3 +11.9 Hong Kong/Hang Seng -6.3 +7.5 Britain/FTSE-100 +14.6 +6.8 France/CAC-40 +31.5 +5.9 Australia/All Ordin. +7.5 +5.3 S. Korea/composite +49.5 +5.0 Canada/TSE-300 -3.2 +1.2 Taiwan/weighted -21.6 +0.7 Germany/DAX +17.7 +0.1 Thailand/SET -4.5 -2.8 Indonesia/composite -1.0 -5.6 U.S./Dow industrials +16.1 +7.6 U.S./S&P; 500 +26.7 +5.3
Year- to-date 1999 change, Market/stock index in U.S. dollars Brazil/Bovespa -10.8% India/Sensex-30 +21.3 Mexico/Bolsa IPC +20.7 Japan/Nikkei-225 +7.1 Hong Kong/Hang Seng +7.5 Britain/FTSE-100 +5.0 France/CAC-40 -1.0 Australia/All Ordin. +9.7 S. Korea/composite +2.6 Canada/TSE-300 +2.1 Taiwan/weighted -1.6 Germany/DAX -6.0 Thailand/SET -5.0 Indonesia/composite -17.9 U.S./Dow industrials +7.6 U.S./S&P; 500 +5.3
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Source: Bloomberg News
