There is widespread disbelief of this rally in U.S. equities, which is exposing myths about stocks. One such myth is that equities are tied strictly to economic growth. This intuitively makes sense, but the market does not care what we think should be true. Remember, equities rallied over 300% from 1932-1937 in the midst of the Great Depression.
Warren Buffett understands this phenomenon, which is apparent from his Op-Ed in the New York Times in 2008, where he wrote:
“A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.”
The Only Game in Town?
The problem with top-callers on the market is that they are too domestically focused. Here’s a chart from Ben Carlson over at http://awealthofcommonsense.com/ that shows foreign equities have not yet surpassed their 2007 peak. What this shows is that global capital is parking in U.S. equities.
The question now is why. Keep in mind that capital is truly global and looks for the best relative returns, always. So when you see the ECB going further negative in bank deposit rates due to the persistent economic crisis, this has an effect on all markets, not just European ones.
An enormous amount of wealth has accumulated in Europe over the years, and this capital is looking to park in a safe haven based on the ongoing economic crisis. Try to think from a wealthy European’s perspective for a second. Where do you go to protect your wealth: Emerging markets? Bonds? China?
Relatively speaking the U.S. is very attractive, which has been severely underappreciated throughout this rally. Also remember, the Dow traded flat for 13 years until about 2012. Viewed from a long-term perspective, the rally is still quite modest.
On a cyclical basis, it’s just time for a rally. The stock market bears have been wrong, and if history is any guide, they will continue to be wrong.Follow