The first few months of 2010 have seen global stock indices surge to their highest levels since 2008, despite continuing concerns about the state of the global economy.
By last week, the ASX 200 was above 5000, the S&P 500 above 1200, the Dow above 11,100 and the FTSE 100 had passed 5800 - their highest levels in 21 months. So what is pushing stock markets upwards? And will they continue down this growth path?
What is driving the rally and will it continue?
This ascent may simply be renewed confidence in the state of the global economy. And in parts due to investors moving past some recent macro issues, such as fears that the Chinese regulators are too aggressively choking off their economy. But what other factors have been at play?
ASX 200 - the key 5000 level and beyond
Last week was a break-through for the ASX 200 with the benchmark index surpassing the 5000 point level for the first time since September 2008. The subsiding of European debt fears, the continuance of strong economic data out of China and a spate of M&A activity across the local market have proved the catalysts for the strong recent run.
The M&A activity in particular has been confirmation for the market that risk assets are in a sweet spot and companies are confident about their future prospects. This realisation has seen a wave of previously sidelined money moving into the market, not wanting to miss out on easy gains or the next potential takeover opportunity.
However, reaching 5000 and staying above it were always going to be two different propositions, with recent trading action suggesting there are plenty of willing sellers above and around this level. Having surged to a post-GFC high of 5025, the market has since drifted back below 5000.
The recent Goldman Sachs securities fraud scandal initially sent a wave of panic through global markets, but the damage looks to have been minimal with many market observers now questioning the strength of the SEC’s case against Goldmans.
Indications suggests that any pullback from 5000 is likely to be relatively shallow and short lived with most brokers still quite bullish on the prospects for equities over the remainder of 2010. A recent survey of strategists revealed a median view for the ASX 200 at year end of approximately 5500, with Merrill Lynch the most bearish at 4500 and Deutsche Bank the most bullish at 6000.
S&P500 back above 1200
Last Wednesday, the S&P 500 made its first foray above 1200 since September 2008. The index was fuelled by consistently improving economic data, a strong start to the latest US quarterly earnings season and growing optimism that the remainder of 2010 would provide further upside for equities.
This optimism had investors talking about how far the market might run this year. However, the SEC shocked Wall Street on Friday by initiating securities fraud charges against Goldman Sachs. On the news, US markets sold off on heavy volume on fears the financial industry (already facing wide-scale regulatory reforms) would undoubtedly face a fresh wave of scrutiny over its trading practices and derivative businesses.
It seems though, that this Goldman's storm could blow over as quickly as it came, with the index quickly rebounding on the back of stronger-than-expected company earnings. With the current US reporting season predicting S&P 500 companies will deliver EPS growth of more than 36% from the previous corresponding quarter, optimism is high that a stronger growth trajectory for future quarters can be established and maintained; this is underpinning investors continuing to buy into equities.
FSTE 100 surpassing the 5800 mark
In the case of the FTSE the falling price of sterling has played a big part. As the price of sterling has dropped, UK companies have become less expensive and therefore more attractive – especially to European investors with the advantage of a strong euro.
On a global scale, while some key indicators have remained ambiguous, others such as recent manufacturing reports from China and the US, have indicated a strengthening rate of global expansion. This has spurred a rally among industrial firms which are highly cyclical, which has in turn bolstered the recent equity rally.
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Updated: 20/04/10
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