Markets: The golden era of stock markets is long gone. But it looks like equities have found a silver age.
The MSCI world index rose by 9 per cent in seven straight up days through Tuesday, to a new high for 2009. That’s impressive, but nothing like the good old days. The index is still 40 per cent below the all-time peak reached in October 2007. And the blissful life of that epoch – when corporate credit was readily available and growth around the world was stable and strong– is not coming back anytime soon.
The golden stock market period was succeeded by a brief dark age of crisis: a deep recession and a series of ever-worse financial troubles. But that is over. GDP is no longer in free-fall and second-quarter earnings reports so far have overall been pleasing: Nokia was disappointing, but Caterpillar, LG and the investment banks have all done better than expected.
Most important for markets, the global government-financial complex is working. Central bank funding is readily available at almost no cost, government bond yields are still low, trading houses are raking in profits and investment-grade credit spreads have fallen back to the level before the Lehman Brothers collapse.
Looking forward, equity valuations aren’t scary. World markets are trading at 16 times expected 2009 earnings, according to Société Générale. But the recession is massacring profits this year. The multiple on expected 2010 earnings is 12.4, cheap by the standards of the last two decades. Even if the forecasts that lie behind that calculation are too optimistic, share prices have room to rise a bit more before they can be considered exuberant. In retrospect, it’s clear the golden period for stocks was built on weak foundations. The foundations of the silver age aren’t much more solid. The economy is still burdened by the past excesses of finance. Even if GDP stops falling in the main industrial economies, the next phase is likely to be anaemic growth. A lurch downward is possible. And neither governments nor central banks can offer much more help without compromising their own credibility.
But those are problems for another quarter.
