Looking at how the cash for continued market growth in 2013 has a tangible backing in both the profitability of international expansions, and the external market influences driving the markets, we might be inclined to start rotating assets into equity markets to take advantage of growth going into the rest of the year.
That being said, before doing so we need to recognize how it is that growth in today’s equity markets is extremely different from those booms that we’ve seen in the past, to the point at which we need to (again) seriously ask ourselves if this is the kind of investment opportunity that persists due to tangible opportunities, or if it is just another hiccup in the markets. To do this, we can look at how it is that the underlying fundamentals of the market are supporting the current upwards momentum. This can be accomplished by comparing today’s Dow Jones growth as compared to its levels in 2007, when it reached the same point.
To compare the growth of the Dow Jones today against that of 2007, we want to look at how it is that the consumer, industry, monetary, and volatility aspects of the market compare against each other. We can start by seeing how it is that unemployment as a whole has actually doubled from 6.7million to 13.2million people, which is an extremely disconcerting figure to start off with. From there, the number of Americans on Food Stamps has grown from 26.9million to 47.69million, suggesting that, out of every unemployed person that can’t afford to feed themselves, there are three more who are employed but still cannot accomplish the same goal.
Combined with a reduced consumer confidence level from 99.5 to 69.5, and a somewhat constant consumer household debt level (ie. people are carrying the same amount of debts as when they were working more in 2007), we can start to see how it is that the American consumer situation does not support continued economic growth. The only real redeeming factor surrounding these dismal figures is the way in which the US government has taken on an extremely expansionary monetary policy, resulting in inflation that reduces the real cost of these household debts for the American consumer. The end result is a transfer of debt from the consumer to the government, so as to help the floundering consumer support themselves through a period of unemployment.
Next to the consumer figures underlying the growth of the US markets, we can take a look at how it is that the overall market itself is growing as an industry. Firstly, we can see how it is that natural gas prices (which should be inversely related to industrial growth) have actually gone up as compared to 2007 (suggesting that the DJIA should actually be a bit lower than it is), while GDP growth is a full percentage point below where it was in 2007. Even though both of these figures stand to be skewed by inflation degradation, their difference is enough to raise suspicious about where it is that growth is actually coming from, because these are key supporting metrics for the markets.
Furthermore, it is important to remember that this GDP number is misleading the way that the increased government spending the markets (as represented by their increased debt load) will be artificially inflating the GDP level. Realistically, we would be safe to assume that actual GDP is much lower today than is being reported. From there, we can see how it is that there has been degradation in the value of the USD against multiple currencies, as well as against gold, and how it is that share volumes traded on the New York Stock Exchange have decreased by more than half since 2007.
While this information on its own is somewhat negligible, it becomes meaningful when placed in context next to some volatility information. Specifically, the low volume of trading going on in equity markets, combined with their overall growth, as well as the increased implied volatility of the markets overall suggests that perhaps growth like this is actually now part of a new ‘normal’ trading cycle. Specifically, because of the way in which volume levels are at a particularly low point, volatility will increase as each incremental trade becomes increasingly meaningful. The end result is a strong argument for the case that this new growth in the US equity markets is actually just the result of today’s regular volatility levels, and that the fundamentals are still not quite there to support a tangible investment opportunity.