Globally, the stock market has become more competitive even as it presents new opportunity. There is more money chasing more global assets. This is why exchange-traded-funds have become so popular in the U.S. They allow investors to “thin slice” the market into discrete sectors that concentrate on energy, financials, or consumer staples.
That’s why we are not that impressed that the S&P 500 closed just two points off its all-time closing high yesterday. Intra-day, the index traded above the high. But it could not close above the mark of 1527, set on March 22nd, 2000.
Still, it was big news back in Team America. So it’s worth a look here in Australia. After all, the S&P 500 represents 75% of the total market cap of the U.S. market. It’s taken it seven years to gain back the ground it lost in the tech crash. And by the way, it’s important to point out that the leading sectors of the last bull market-technology, media, and information stocks-are all still down. Telecom and tech stocks are 60% and 40% below their 2000 highs…nearly seven years on.
The leaders of the last bull market are never the leaders of the next bull market. Since 2000, the leadership of the S&P has shifted from TMT stocks to energy and basic materials. Those two sectors, along with financials, have accounted for much of the gain in the last few years (reinforcing the need to be in the right asset or sector, and not just “the market.”! But is a nearly- new high on the S&P telling us that the global economy has clear sailing ahead?
If you subscribe to the belief that the stock market leads the economy, then the stock market is telling us that our fears of high energy prices, too much corporate leverage, and imbalanced global growth are just a bunch of grumpy noises coming from the disgruntled sidelines. It is telling us that the world is on the edge of a huge boom, and that we should be buyers.
Or maybe the S&P is just drunk on the USD$40 billion in buyout activity that’s sent markets higher this year. The M&A and private equity binge appears to have given the market some liquid courage to test its 2000 limits. While it’s true that the market could be forecasting higher corporate profits and greater global growth, we think it’s more likely that stocks are making a new highs for a far simpler reason: global credit growth exceeds global asset supply.
Markets and Money