The S&P 500 climbed 8.91 points, or 0.5%, to 1804.76. The index is up 27% this year, on pace for its biggest annual gain since 1998, when it climbed 31%. It took more than 13 years for the Index to climb past 1,600 and this year has risen past 1,700 and now 1,800.
An accommodative Federal Reserve, paltry returns in assets such as bonds and steady expansion in corporate profits continue to draw investors to equities. Bulls say the U.S. economy’s expansion—muted as it is—stands out when compared with conditions in other parts of the globe and is liable pick up next year.
Meanwhile, individual investors appear to be regaining comfort with stocks. Mutual funds investing in U.S. shares took in a net $548 million in new cash in the week ended Wednesday, according to fund tracker Lipper, the sixth-straight week of inflows.
Thanks to fracking and shale oil production, the United States is becoming a leading producer of Oil and Gas in 2013, overtaking Russia. Some facts:
- Average oil production in October 2013 was 7.8 mbpd, 19% higher than last year.
- Rising crude supplies from North Dakota’s Bakken shale and Eagle Ford shale in Texas have helped the U.S. become the world’s largest exporter of refined fuels.
- Per EIA, Texas pumped 2.575 mbpd in June-if Texas were its own country, it would rank 15th in the world in terms of oil production.
- The U.S. met 87% of its energy needs in the first five months of 2013 and is on target to hit the highest annual rate since 1986.
- Exports are surging from 1 mbpd in 2006 to 3 mbpd recently.
- Imports are falling from a high of 14 mbpd in 2007 to under 10 mbpd recently. If you take out the re-export of refined products, the Net Imports have fallen even faster to 6 mbpd from 13 mbpd.
Can this declining U.S. net import of Oil and Gas have an impact on the U.S. dollar through its linkages to Current Account Deficits? Generally, a declining Current Account Deficit should be a tail wind for that country’s currency. Also, cheap and abundant natural gas in the U.S. is becoming a competitve advantage to begin bringing offshore production back onshore, which can further impact trade flows and deficits.
Can the once mighty U.S. dollar regain its footing again?
The Dow Jones Industrial Average closed above 16,000 for the first time Thursday, extending a rally that has the blue chip-index on pace for its best year in a decade. With Thursday’s gain, the Dow has advanced 22% so far this year, putting it on pace for the biggest annual rally since a 25% gain in 2003. The blue-chip index is up 144% from its 2009 low. The latest 1,000-point move in the Dow took just 139 trading days, the sixth-fastest 1,000-point gain for the Dow.
Among Dow components, Boeing Co. has led the way higher over the last 1000 points, rallying 40%, highlighting strong demand for commercial aircraft as the global economic recovery takes hold. 3M Company, meanwhile, has risen 20.6% during the same time frame.
This year, all but two of the 30 Dow stocks have gained ground this year except two: Caterpillar Inc. and International Business Machines Corp. and have declined 8.5% and 4.1%, respectively year to date.
Gains on Thursday came after Janet Yellen moved a step closer to becoming the next Federal Reserve leader and a better-than-expected report on the jobs market boosted sentiment.
Behind the broader push that took the Dow through this latest milepost: seemingly greater confidence in the stock market’s ability to withstand a scaling back by the Federal Reserve of the bond-market purchases it has been employing to stimulate the economy. More broadly, bulls point to continued expansion in the U.S. economy and recovery in corporate profits as drivers of the rally. Years of ultralow interest rates have bolstered corporate balance sheets and boards have rewarded investors by buying back stock and boosting dividends.
As such, investors are paying more for stocks relative to the underlying companies’ earnings, making it harder to argue stocks are cheap. The price to earnings ratio for the S&P 500, a broader measure of large U.S. companies’ stocks, stands at about 16.1, up from 13.7 at the start of the year but little above its 10-year average of 15.6, according to FactSet.
The 10 points “represent a broad list of macro themes from our economic outlook that we think will dominate markets in 2014.”
Here they are, with the key quotes pulled from the note.
1. Showtime for the US/DM Recovery
Our 2013 outlook was dominated by the notion that underlying private- sector healing in the US was being masked by significant fiscal drag. As we move into 2014 and that drag eases, we expect the long-awaited shift towards above-trend growth in the US finally to occur, spurred by an acceleration in private consumption and business investment.
2. Forward guidance harder in an above-trend world
Despite the improvement in growth, we expect G4 central banks to continue to signal that rates are set to remain on hold near the zero bound for a prolonged period, faced with low inflation and high unemployment. In the US, our forecast is still for no hikes until 2016 and we expect the commitment to low rates to be reinforced in the next few months.
3. Earn the DM equity risk premium, hedge the risk
Over the past few years, we have seen very large risk premium compression across a wide range of areas. While not at 2007 levels, credit spreads have narrowed to below long-term averages and asset market volatility has fallen. Even in a friendly growth and policy environment such as the one we anticipate, this is likely to make for lower return prospects (although more appealing in a volatility-adjusted sense). In equities, in particular, the key question we confront is whether a rally can continue given above-average multiples. We think it can.
4. Good carry, bad carry
Our 2014 forecast of improving but still slightly below-trend global growth and anchored inflation describes an environment in which overall volatility may justifiably be lower. Markets have already moved a long way in this direction, but equity volatility has certainly been lower in prior cycles and forward pricing of volatility is still firmly higher than spot levels. In an environment of subdued macro volatility, the desire to earn carry is likely to remain strong, particularly if it remains hard to envisage significant upside to the growth picture.
5. The race to the exit kicks off
2013 has already seen some EM central banks move to policy tightening. As the US growth picture improves – and the pressure on global rates builds – the focus on who may tighten monetary policy is likely to increase. As we described recently (Global Economics Weekly 13/33), the market is pricing a relatively synchronised exit among the major developed markets, even though their recovery profiles look different. Given that the timing of the first hike has commonly been judged to be some way off, this lack of differentiation is not particularly unusual. But the separation of those who are likely to move early and those who may move later is likely to begin in earnest in 2014.
6. Decision time for the ‘high-flyers’
A number of smaller open economies have imported easy monetary policy from the US and Europe in recent years, in part to offset currency strength and in part to compensate for a weaker external environment. In a number of these places (Norway, Switzerland, Israel, Canada and, to a lesser extent, New Zealand and Sweden), house prices have appreciated and/or credit growth has picked up. Central banks have generally tolerated those signs of emerging pressure given the external growth risks and the desire to avoid currency strength through a tighter policy stance. As the developed market growth picture improves, some of these ‘high flyers’ may reassess the balance of risks on this front.
7. Still not your older brother’s EM…
2013 has proved to be a tough year for EM assets. 2014 is unlikely to see the same level of broad-based pressure. The combination of a sharp downgrade to expectations of China growth and risk alongside the worries about a hawkish Fed during the summer ‘taper tantrum’ are unlikely to be repeated with the same level of intensity.
8. …but EM differentiation to continue
2013 saw countries with high current account deficits, high inflation, weak institutions and limited DM exposure punished much more heavily than the ‘DMs of EMs’, which had stronger current accounts and institutions, underheated economies and greater DM exposure. This is still likely to be the primary axis of differentiation in coming months, but in 2014 we would also expect to see greater differentiation within both these categories.
9. Commodity downside risks grow
Last year we pointed to the ongoing shift in our commodity views, ultimately towards downside price risk. The impact of supply responses to the period of extraordinary price pressure continues to flow through the system. And we are forecasting significant declines (15%+) through 2014 in gold, copper, iron ore and soybeans. Energy prices clearly matter most for the global outlook. Here our views are more stable, although downside risk is growing over time and production losses out of Libya/Iran and other geopolitical risk is now playing a large role in keeping prices high.
10. Stable China may be good enough
Expectations of Chinese growth have reset meaningfully lower as some of the medium-term problems around credit growth, shadow financing and local governance have been widely recognised over the past year. Some of these issues continue to linger: the risks from the credit overhang remain and policymakers are unlikely to be comfortable allowing growth to accelerate much. But the deep deceleration of mid-2013 has reversed and even our forecast of essentially flat growth (of about 7.5%) may be enough to comfort investors relative to their worst fears.
The Paris-based World Federation of Exchanges (WFE), an association of 58 publicly regulated stock market exchanges around the world, recently released updated data on its monthly measure of the total market capitalization of the world’s major equity markets through the end of October. Here are some highlights:
1. As of the end of October, the total value of equities in those 58 major stock markets reached $62.64 trillion. That was just slightly below the all-time record monthly high of $62.77 trillion for global equity valuation in October 2007, several months before the global economic slowdown and financial crisis started, and caused global equity values to plummet by more than 50% (and by almost $34 trillion), from $62.8 trillion at the end of 2007 to only $29.1 trillion by early 2009 (see chart above).
2. Global equities gained almost $2 trillion in value during the month of October, and increased by 3.2% from September.
3. Compared to a year earlier, October’s world stock market capitalization increased by 19.6%, led by a 22.2% gain in the Europe-Africa-Middle East region, followed by gains of 20.8% in the Americas and 15.4% in the Asia-Pacific region.
4. By individual country, the largest year-over-year gains for October were recorded in Greece (118%), Ireland (53.2%), Bermuda (47.3%), the UAE (40.4%) and Taiwan (37.3%). In the US, the NYSE capitalization increased by 25.7% and the NASDAQ by 27.2%. The biggest losses in equity value over the last year were posted in Peru (-15.9%), Turkey (-14.5%) and Cyprus (-14.5%).
Compared to the recessionary low of $29.1 trillion in February 2009, the total world stock market capitalization more than doubled (115.3% increase) to the current level of $62.64 trillion, recapturing almost all of the global equity value that was lost due to the severe global recession and the various financial, mortgage and housing crises in 2008 and 2009. The global stock market rally over the last five years has added back more than $33.5 trillion to world equity values since 2009, and demonstrates the incredible resiliency of economies and financial markets to recover and prosper, even following the worst financial crisis and global economic slowdown in generations.