Stock Market Continues to Surge Despite Weak Economic Climate

The global stockmarkets continue to surge despite the weak economic climate. Both the S&P 500 and FTSE 100 have continued to reach all time highs over the past couple of months. Is this the beginning of an economic recovery? We think not. In fact we do not anticipate a recovery in 2013.

Marios Nikolakogolou, an experienced city trader quotes “The stockmarket has reach record highs in 2013, but where is the euphoria?”. The statement sums up the startling reality of the current economic environment. In the past the stockmarket would reach a new high and would be met with jubilation from traders in the city. The current surge in the stock market is different in that s is backed by monetary easing and excessive money printing from the Central Banks. The funds are filtering into the stockmarket but do not appear to be filtering down to the people on the street.

Quite simply the easy money is being filtered into the banks in order to shore up their balance sheets and the funds are in turn being reinvested into the stockmarket. This, combined with near zero interest rates means that investors are no longer able to generate a reasonable return on their assets. Leaving excess funds in the bank or investing in bonds will not generate sufficient interest to keep up with inflation. Equities have therefore been regarded as the new “safe haven” as they continue to offer a return on investment together with an element of protection against inflation.   

US Fiscal Cliff

Fears over the US Fiscal Cliff were averted in January 2013 following a last minute deal to postpone the effects to the second quarter. If a last minute deal had not been reached, this would have triggered automatic tax rises and spending cuts amounting to $85 billion which would have sent the US economy into recession. The new deal by the government has simply “kicked the can down the road” until the next deadline arises. News that the Fiscal Cliff issue was “resolved” resulted in a boost to the US stockmarket with the Dow Jones and S&P 500 rising to all time highs in early 2013.

In March 2013, the US government were unable to postpone the sequestration, or spending cuts to healthcare and social security. However, this appeared to go unnoticed by the markets as equities continue to rise as at the current day and appear oblivious to the fact that the issues regarding the rising government deficit have not been fully addressed.

European Central Bank Cuts Interest Rates to 0.5%

The European Central Bank (ECB) cut interest rates from 0.75 per cent to 0.5 per cent in May 2013 after weak economic data reported by the struggling Eurozone economies. The ECB action aims to provide a boost to its Eurozone members amidst growing fears over the Eurozone crisis and doubts over the Eurozone recovery. The ECB follows the US, UK, China and Japan who have all cut interest rates to record lows.

The possibility of rising inflation is increasingly likely given the environment of low interest rates and increase quantitative easing adopted by the major Western economies. However, the global recession and weak economic growth have scaled back the effects of inflation for the time being.