Since 2010, the Dow Jones index has gained 74.7%, rising from 10.583 to 18.493. And the Nasdaq 100 has shot up even further over the same period, rising 147% from 1.886 to 4.665.
Meanwhile the Eurostoxx50, for example, is now below 2010 levels at 2.966 points, compared with 3017. The German Dax has been the best performer in Europe, but has only gained about 68%, while the FTSE100 has risen 22.4% and the French CAC 10.6%. And don’t lets even mention the Ibex 35.
And this continues. For example, the last month has been impressive with the DJ index gaining 7.9% in just 20 sessions and the Nasdaq 100 rising 11.1%. These records are starting to worry the same people as always, the ‘bears’, who are convinced that the New York indices are creating a bubble which is about to burst. In their view, there are no fundamental reasons at the moment for this investor optimism. They warn that the world is facing the threat of recession caused by the emerging countries’ weakness, low oil prices and the disastrous situation in Europe, including Brexit.
However no-one appears to be listening to these cautious views. And, on the other hand, they are not new. For years we have been listening to certain analysts predicting the end of the strong rises in the US markets. So much so that many fund managers and banks, when people have listened to them, have moved investments to Europe, only to find that the Dow Jones and the Nasdaq continued to climb. A case in point is the Ibex 35 index which, according to a huge number of analysts, has been destined to rise for many years. And yet it remains at 8.500.
So now comes the big question. What do the New York markets have which the others don’t have. The first obvious thing is that the US economy has been growing at a good pace for the last few years, something which has not happened in Europe. Over the last six years, the US economy has expanded at rates of over 2%, while that of the eurozone has generally grown below 1.7%. There has even been negative growth a couple of years (2012 and 2013). While aggregate US growth in the last six years was 12.7%, in the eurozone this was just 5.1%. And whatsmore, at the end of the day, unemployment in the US is below minimum levels, at 4.9%, with 2,887.000 new jobs created in June.
The second thing, which is even more obvious, is that the big companies listed on the New York markets have not stopped growing. One sector above all has been the driving force, technologies, followed by the health sector, which have added dynamism to the whole economy. Microsoft, for example, beat all analysts’ estimates due to strong sales at its Azure division.
And we have to add the stragglers, sectors like the banking sector, which are now also performing better. Investors were pleased with the results of Bank of America and, particularly, JP Morgan. Even the auto sector is beginning to gain ground. General Motors posted record second quarter profits of $2.870 billion, double that recorded a year ago.
Thomson Reuters see this trend continuing, with many companies expected to beat analysts’ forecasts. Of course in the last few quarters, their results have reflected the slowdown in global growth. According to FactSet, the profits of those companies included in the Standard&Poor’s 500 dropped 5.6% in the second quarter, the fourth registering declines. But things are improving and the falls are less sharp. The idea is that for the companies listed on the NewYork exchanges as a whole, earnings will grow by 1.5% in the third quarter and by 9.1% in the fourth.
All this explains why investors are starting to bet that both the US economy and companies are about to experience a change in trend, with a strong recovery in growth. Furthermore, this bet has been reinforced by the feeling that the Fed is not going to raise rates. The chairman of the Atlanta Fed, Dennis Lockhart, said that the Fed “will probably remain cautious and patient with regard to future rate hikes.”
So given these encouraging signs, it’s not surprising that the ‘bulls’ in the New York market are doubling their bets. At the end of the day, investing in the stock market is all about expectations, more than about past realities and yields.