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FTSE and Dow: Silver Lining or Eye of the Storm?

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Do you remember what you were doing 13 years ago?  Probably still breathing a sigh of relief that the Y2K computer software issue didn’t really exist.  And, hey, things were looking good.  The key stock indicators looked great.  It was the start of a whole new millennium.  What could possibly go wrong?

© Image copyright nirak

Well, a lot of things have gone wrong over the ensuing years, not the least of which has been the bursting of the dot-com bubble in late 2000 and the global economic crisis of 2007-2008 that was driven by the collapse of the sub-prime lending schemes.  The economy was shaken to its very core as people went underwater on their mortgages, whilst many of those same people also found themselves unemployed.  I could describe the crisis in more technical terms, but the fact is that the average family on the street understands the crisis only in terms of how it affected them.  Most of those people still don’t know who to blame for their own personal crisis.  Was it the banks, the mortgage lenders, inept business executives, or the government?

Equity markets have begun to appear as the silver lining beyond the dark clouds that have hung over us all, especially during the past five years.  The FTSE 100 closed at 6,755.63 on Monday.  That’s the highest close since September 2000.  At 1:30 this afternoon the FTSE was continuing to gain at 6.769.07.  The Dow Jones Industrial Average closed above 15,000 for the first time ever on 08 May 2013.   It reached 15,390.27 during intra-day trading yesterday.  The S&P 500 is almost 1,000 points higher than its nadir in March 2009.

There is a good deal of exuberance on the trading floor as stocks strengthen.  However, as happens every time the markets generate enthusiasm and optimism, there also arises those who sound warnings of abysmal things to come.  The overriding concern is always the old adage of “What goes up must come down.”  But there are bona fide reasons to expect reversals.  One reporter noted that “Demand for equities has been stoked by the action central banks have taken to support the economy, which have driven down bond yields, sending investors looking for returns into the equity markets.”  One could make the claim, then, that the boom in the equity market is largely due to major investors reallocating their assets in accordance with the economic conditions.

Tim Ghriskey, CIO of Solaris Group described the anxiety in the market like this:  ”There are people scared by the sharpness and the length of this rally, which is totally understandable.  But there are still those who are afraid to not invest and miss the rally.”  Did I wait too long to invest?  What if the bottom drops out if I jump in now?  Questions like those are rampant.  However, there does not seem to be any reluctance on the part of major investors to participate.  Quantitative easing and other government stimulus actions may be having a greater impact on the markets than in any other area of the world economy.  Speaking of which, other leading economic indicators aren’t looking all that well, with negative reports continuing to pour in regarding housing and construction starts, manufacturing, retail, and unemployment.

For certain, there is excitement in the air as the indices continue to climb.  The question remains, are they the silver lining or are they just the eye of the storm?

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