Hours after British citizens voted for their nation to ditch the European Union, global stocks took a historic two-day tumble.
The Dow dropped nearly 900 points. But lo and behold, shortly after this they not only stabilized but shot to historic highs, no doubt in some part because of the prospect of yet more government stimulus.
But stocks generally rise in tandem with company earnings, which are a product of the opportunities presented by a growing economy. So where exactly is that growing economy? There were no signs of it in 2016’s anemic first quarter. And second-quarter earnings are projected to be lower than that hugely disappointing performance.
No wonder: rising costs and revenues that can’t keep pace have squeezed businesses. A costly and burdensome regulatory environment, courtesy of Washington, coupled with tepid domestic economic growth and a slowing global economy are adding to the trouble.
So why then have stocks reached a record high? A few theories:
- The Dead Cat Bounce: This is the Wall Street term for a temporary recovery from a sustained bear market. It’s a useful analogy — even a dead cat will bounce if dropped from a great height. Steeply dropping prices will bounce back before they finish their fall. But the data contradict this theory: this is one of the longest bull markets and the recent rally seems to have staying power.
- The Cheap Oil Bounce: With oil prices predicted to fall to $39 a barrel, investors are betting that consumer’s gas savings will be spent in ways that boost the economy. This doesn’t take into account that wages have been flat, consumers are anxious about the economy and many are using any extra money to pay off debt or bolster their savings.
- The Global Capital Bounce: Investors are finding less attractive opportunities to put their money to work: a public health crisis in Africa, economic chaos in South America and Europe, a slowing economy in China, negative interest rates, and an increasingly hostile Russia. As a result, global capital has flowed to the relatively safe United States, which currently is the cleanest shirt in the dirty laundry hamper.
- The Central Bank Bounce: Because of the worsening global economic outlook and the accompanying uncertainty coupled with modest and fragile U.S. growth, investors are eagerly expecting even more stimulus from governments.
Of these theories, I subscribe a combination of global capital and central bank bounces.
That’s because I believe that the markets are being mostly sustained by artificial means rather than fundamental strengths.
These emergency measures, which were meant to be temporary, have gone on for almost a decade with modest results and ballooning government balance sheets that are simply not sustainable.
Maybe much more of the same will eventually produce sustained robust growth, but I’m not betting on it. And if this hunch is correct, new strategies, like freer markets, will need to be pursued.
A failure to do so will result in a most unpleasant reckoning.
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