Global Market Commentary

November 06, 2014

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Why the Stock Market Bears Have Been So Wrong

Today’s negative and incorrect tone from world news commentators — including stock market commentators– is easy to understand. 

It is not hard to see the source of the media negativity. The negativity is due to the fact that negative news sells. The public at large is feeling economically pinched in the U.S., Europe, and Japan, and has felt this way for several years. Therefore the public is more receptive to negative news.

However, those whose wealth is growing, or is at least partially determined and derived from investments in stocks and real estate, are feeling much less pinched than the public at large.

This also accounts for the view by many who have no stake in real estate or stocks that the Federal Reserve under Ben Bernanke did a bad job, or that QE has had no positive effects. The fact is that the rise in value of stocks and real estate and the stabilization and recapitalization of the banking system since 2009 has been a direct result of the Fed’s actions taken to support the U.S. and world banking system from 2010 to the present.


1. The U.S. banking system has been greatly stabilized, and the Japanese banking system has been stabilized. China is in the process of gradually stabilizing the shadow banking system (the financial activities of non-bank financial entities, primarily insurance companies and stock brokers in China), and Europe is very slowly and belatedly taking half measures to stabilize their banking system.

2. The industrialized world’s weak point today is the European banking system and the German-led coalition of Euro union members. Their resistance to change in Europe recalls the attitude of U.S. economic advisors in 1937, who clamped down on the banking system again in the U.S. and led to a second wave down in the great depression of the 1930s. It was after the major decline from 1929 to 1932 that the U.S. and world economy enjoyed an uptrend from 1933 to 1936. In 1937, ill-considered and constricting economic policies led to a renewed decline in economic activity just as Germany prepared to invade much of eastern Europe.

3. Those who own stocks and real estate have enjoyed the recovery in values — stocks recently touched a new high, and real estate is nearing highs in some parts of the country. In other parts real estate is just beginning to return to favor.

4. Unemployment is down. New unemployment claims are down as well, employers are now adding employees, the number of technical job openings with no takers is at an all time high. The unfilled jobs are primarily for machinists, skilled tradespeople, and engineers.

5. The fear expressed by stock market commentators about the end of QE and how the U.S. economy can grow without it is misplaced, and ignores many economic facts. We explain some of those facts and why the negative press on the economy and stocks has been wrong.

The U.S. Is Doing Fine

1. The U.S. economy has been doing well. Its growth is good — not great, but certainly respectable. As of the third quarter, real U.S. GDP growth is + 2.4 percent in the last 12 months. GDP growth including inflation is + 3.9 percent for the last 12 months. This has led to strong corporate profits; S&P 500 corporate profits are up 8.5 percent for the U.S. in 2014 thus far, and 8.2 percent for the last 12 months. This leads to strong stock market performance — up about 9 percent this year. That’s in line with profits, so the U.S. stock market has not gotten more expensive in 2014.

2. The U.S. Dollar is very strong, with money flowing into the U.S. from all over the world.

3. The Japanese Government Pension Investment Fund (GPIF) is a huge pension fund with about $1.1 trillion in it. Last Friday, the Fund announced that it will increase the proportion of its portfolio allocated to equities. It will put 25 percent of its portfolio into Japanese stocks, and 25 percent into stocks in other countries. It is obvious that a large part of the 25 percent will go into U.S. stocks to benefit from the rising U.S. Dollar and higher yields available in U.S. stocks. Japan, which has been fighting deflation, has taken very strong actions to come out of the deflationary mindset.

4. U.S. QE 3 ended, and contrary to the gloom-spreaders’ predictions, stocks rose after the Fed announced that it was ending QE. They rose even faster when it became obvious that both Europe and Japan were beginning new QE programs just at the time the U.S. was ending theirs.

Why the Bears Have Been Wrong About the Rest of the World

1. Europe has begun a form of QE to fight deflation and encourage banks to lend. Japan has increased its QE with a bold new program.

2. Almost all countries in the world are seeing their currencies fall versus the U.S. Dollar, making their exports more attractive.

3. All of the “Oh my God, it’s the end of the world!” bears saying the world is going into deflation are incorrect. Japan has been in stagnation and flirting with deflation for years, and Europe is close to deflation, but not actually deflating. The fact is that the U.S., the U.K., China, emerging Asia, and some other parts of the world are really doing quite well. They are not suffering from deflation.

It has been correct to be optimistic and bullish in recent months. We expect that the fact that things are going well will not dissuade the pessimists from their attitude that things are terrible. We welcome that, because we know that bull markets do not end until the average person thinks that stocks are great. Public psychology is far from that stage — and we anticipate a continuing and vibrant bull market.

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