Stock Markets Are Hitting New Highs, But Is the Recovery for Real?
Guest contribution provided by Forex Traders
"Dow Jones approaching new high." "Stock markets have doubled in value from previous lows." Financial press headlines continue to scream the news that stocks are back. Even the average investor has poured $24 billion back into equities, perhaps a bit late since the run up began seven months ago, but better late than never, Right? Wrong! All technical indicators are pointing to an "overbought" market, a general signal that a correction is imminent. As the wise money heads for the exits, the Average Joe will once again be late to the party, buying high and selling low, and then complaining that the entire system is rigged.
Has there been a recovery that we can count on to last? If you believe the stock market's performance is a signal of what is to come in the economy six months down the road, then the answer could be yes. There have been signs of a recovery. GDP is up close to 3% on an annualized basis, a good sign. Merger activity is up. Manufacturing activity is back to levels not seen since 2004. Has there been a recovery and we just missed it?
Minor signs of improvement do not make a recovery! The truth is unemployment is still over 9%. Our real estate market is still in shambles and will take years to work off existing and "shadow" inventories before real improvement and appreciating home prices can return. The commercial sector is also in disrepair due to vacancies in office space from laid off workers. Lastly, the government has yet to address deficit and public debt concerns, although the threat of a government shutdown in March pervades the news headlines today.
Prices for both hard and soft (the ones that come from agriculture) commodities have spiked up abnormally over the past seven months also. Gold, copper, corn and cotton have all witnessed unprecedented run-ups that experts claim are unsustainable. Generally, a rise in commodity prices is a welcomed sign since it typically portends an economic recovery on a global scale. However, the present concern quickly switches to inflation. Consumers may have witnessed a sharp fall off in home prices, but groceries and gasoline have secretly risen, demanding more outlays from an already tight home budget.
Our Dollar has weakened over the past seven months. Investors in forex trading have seen the currencies for Canada, Australia, and Japan appreciate to new high levels, but flatten out of late as if waiting for the market to make up its mind. Only the "EUR USD" currency pair involving the Euro has depreciated over the past year, due mainly to the European debt crisis.
So why are the markets up? Most insiders attribute the recent success to the Fed's program of Quantitative Easing, its latest program scheduled to run out in June. The Fed will have bought back $600 billion in government securities by June, effectively expanding the money supply by at least an equivalent amount. The gains for the economy and the stock markets by association have therefore come from government stimulus. When the stimulus stops, as it surely will, what next?
The new funds unfortunately did very little to increase domestic hiring. The funds did stimulate merger activity, company stock buy backs, and long-term initiatives in Asia and other emerging market countries where companies hope to sell their goods and services in the future to burgeoning middle class populations overseas. Capital follows growth, and growth is predominantly in emerging markets, not the Western world.
Investors should be cautious at this stage. Anything could happen near term.
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