Plenty of people will dismiss the recent stock-price recovery as a dead-cat bounce. Even more will call it a bear market rally.
Yet as equity prices creep higher, the bears may soon have to concede defeat. The Standard and Poor’s 500 Index has gained about 15% since early December and most other major benchmarks have made solid gains in the same period. At some point, it will become known as the 2009-2013 bull market.
Only one thing is missing: a story. A real bull market needs a simple narrative that convinces investors that equities are worth double what they were valued at only a few months ago.
So what could be the story this time around? There are four plausible candidates: rising savings, accelerating inflation, a takeover boom, and the scarcity of capital.
Markets need stories as much as any Hollywood scriptwriter does. Stock prices go up, down and sideways for reasons we will probably never quite figure out. Human brains find that hard to handle, so we like an easy explanation that puts things in order. Chaos and randomness are the scary alternatives.
During the bull market of the 1990s, we had the dot-com, new economy story to explain the surge in stock values.
During the 2003-2007 bull market, we had globalization and the emerging markets of Brazil, Russia, India and China (Bric).
And for the next bull market? Here are four stories that could be used to justify it.
The savings story: People are putting money aside again. The US savings rate in April jumped to 5.7%, the highest rate for 14 years. Michael Darda, chief economist at MKM Partners Llc. in Greenwich, Connecticut, estimates it will reach 9%, compared with a low of minus 2.7% at the peak of the housing boom. There’s no mystery about that. Households, much like banks, are repairing their balance sheets, and they can only do that by saving more.
The same will probably be true of other heavily indebted economies such as Britain. All that saved money has to go somewhere. With interest rates close to zero, there’s no point keeping it in the bank. Instead, a wall of money is about to descend on the market, creating huge demand for equities.
The inflation story: Central banks around the world are following the policies of quantitative easing, or what used to be known as printing money. At a certain point, it is bound to cause high inflation rates, or at the very least an investor fear of surging prices. It may already have done so.
You don’t want to be holding cash while inflation makes it less valuable by the day, and central banks keep creating more of the stuff. Instead, investors will switch into real assets that can hold their value, such as stocks, real estate or commodities. Equities are the simplest to trade, and more demand equals higher prices.
The takeover story: The last rally was all about the emergence of the Bric economies. This one will be about them buying North American and European assets. The rising Bric giants are going to need technology and brand names, and they will want to buy them. That is already happening—Russian interests just acquired a big stake in General Motors Corp.’s European unit Adam Opel GmbH.
Expect a massive takeover boom as the Bric giants clamour for the prizes. They will end up paying a premium for trophy assets, another good reason to push up the value of equities.
The shareholder story: Over the last decade, chief executive officers loved to talk about shareholder value. Mostly it was just nonsense. Chief executive officers didn’t need stockholders because capital was easily accessed from banks or the bond market. If that didn’t work, they could get a friendly private equity firm to buy them out, or pay a crazy price for a unit. Shareholders were about as influential as the cleaners or the secretaries, and ranked about as high in corporate priorities.
Now that is about to change. In the coming years, capital will be in short supply. The only place that companies will be able to get it will be from their shareholders. In return, they will have to be rewarded with higher dividends and stock prices.
Now all we need is for Goldman Sachs to pick one of those stories, put it into every research note, and this bull market can get some real momentum.
Who knows, investment bankers may be out buying Bentleys again this year if this rally has legs.
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