Expert Comment: Dow Jones and FTSE climb to new highsFriday 8 March 2013
Director of Seed Centre, Reverend Tony Bradley, puts forward his views on the recently announced stock highs and what this means for the economy.
So, happy days are here again. This appears to be the message of the numbers coming out of the US markets. During this past week the Dow Jones index of leading shares has reached an all-time high and, whilst the UK has not quite achieved such dizzying heights, the FTSE is on the up. All of which means we can put the dark days behind us and expect to imminently emerge into the full light of the warm sunny uplands of economic prosperity.
Well, perhaps, we had better hold on. The important questions are: why has the Dow reached this peak? And, what are the implications for the economy, so far as we view it on this side of the Big Pond?
The Dow measures the performance of the largest top companies in the US (Fortune 500), just like the FTSE 100. But, these tend to be the most important multi-nationals and global brands. As such they distort the view because they are not a reliable guide to domestic (‘the real economy’) performance. For example, in the UK, it is the FTSE 250, including the next 150 largest companies, most of which are domestic, that is a better guide.
Actually, this is encouraging news for us in the UK, as the FTSE 250 has gained 22% in 2012-13, compared to only 6% for FTSE 100. But, the less good news is that the UK figures show that we’ve just about returned (when inflation adjustments are made) to the position we were in at the turn of the Millennium, 12 years ago! Every pound invested in 1999 would have given you a return of precisely £1 equivalent in 2013, if you’d stuck with your investments!
In the US, the reasons for the Dow’s rise are a complex of supply and demand side factors, largely led by the policies of The Federal Reserve (US Central Bank). On the demand side the level of Quantitative Easing (not really ‘printing money’ but issuing money, as long-term gilts at very low bond yield rates, to retail banks) has been truly staggering. This has been augmented by the key supply side tactic (just like our own Bank of England) of keeping interest rates at an all-time historical low of below 1% (serial long-term is 5%).
Taken together these policies have created a climate for both investment and spending. In the US this has been relatively effective. Well, if you hold your nose to the stratospheric $16Trillion US Federal debt mountain. Equally, what has happened on both sides of the Pond is that global multi-nationals have used these favourable monetary conditions to hoard cash. For example, the largely sleeping giant that is Apple (in the innovation doldrums since the death of Steve Jobs) is sitting on a cash mountain of $137BN. Not spending but saving and hedging. And much the same is true over here.
That said, over there they are spending more, because the Federal Government is ignoring ‘the fiscal cliff’ (a range of budget restriction measures automatically triggered by increases in the size of the debt mountain) and is deferring ‘austerity’. This explains the herd of elephants in the room over here. We are, arguably, according to the IMF, World Bank, OECD, EU, IEA, CBI and just about every other acronymic economics organisation, cutting too far and too fast.
Which means that whilst the stocks climb and the money piles increase, institutional shareholders begin to feel that Spring in on the way. By contrast, most of us, and the millions who’ve either lost their jobs, feel threatened with business closure or are seeing benefits and services cut deep into the bone, can’t see much connection between the Dow and their real lives. Warm sunny uplands? For a few, perhaps. But, I’d hold onto your umbrella and do your buttons up against the economic cold. Oh, and, perhaps, keep a weather eye on markets in Italy, Belgium and France, amongst others, rather more than the Dow.