Stock markets around the world are reaching record highs upon the news that Greece will stay in the Eurozone and avoid contagion risk. Fed Chair Yellen also pushed stocks higher on the perception she remains Dovish – delaying the long expected rate hike trend.
Should we beware of Greeks bearing gifts? Greece agreed last week to European demands to stay on QE and on the Euro – free money drug – while inflicting more economic pain of reforms. The Greek outline of compliance was accepted. The Greek Tragedy of the past 6 years is being dragged out. Stock and bond markets will take any hint of good news and run with it to new highs, while in reality it remains to be seen if Greece will comply specifically with its general austerity reform outline. For now its good news and if their economy recovers quickly then compliance may work.
The other good news is that US Federal Reserve Chairwoman Janet Yellen has hinted she will not be raising rates unless the economy or inflation rise faster. As long as energy prices stay low the markets will assume the first rate rise will be withheld from the markets allowing a Goldilocks environment for stocks. Should earnings and GDP accelerate, then interest rates will rise earlier than expected and stocks will pause. At that juncture there should be a medium term market adjustment sending stock prices down over 10% again. There is no sign of this yet and short term Buy signals from last week are still viable as the tech heavy Nasdaq approaches its Tech Bubble 2000 peak near 5000. Investors are still 90% in stocks.
There is a simple reason why stocks, wages, consumption and the economy in Europe and the US will head even higher. Sentiment! There will be no acceleration in consumption or rise in wages or inflation or strong GDP without a healthy consumer sentiment. The surveys reflecting a mood of deep or mild recession each of the past 6 years has finally broken with the collapse in energy prices and corresponding consumer euphoria. While the main trigger has been lower energy prices in an easy credit environment with near record job openings: the bottom line is if you feel better you will spend more, borrow more and hire more employees at higher wage levels. This all works for stocks and earnings. The caveat is this good news will come with a hiccup over concerns of higher interest rates and tighter credit in the future.
The recent surge in confidence on the right edge of this chart (above) coincides perfectly with the collapse in Oil from $100+ to <$50 a barrel. With production remaining elevated through 2015 it’s unlikely Oil prices will surge back into the $80 to $100 zone without a very strong economic demand surge. Cheap gas and very strong job demand should keep consumers credit happy.
Europe has been far less accommodative than the US and has thus experienced more negative sentiment and a much slower economy – especially in southern Europe. With the welcome but unnecessary new Euro Quantitative Easing (QE) that began last month to print more money to buy more debt to suppress interest rates, European consumers may become excessively euphoric later this year. Consumer confidence in Germany has hit its highest level in 13 years!
What happens when consumer sentiment surges in a cheap credit atmosphere? Jobs and wages rise! Not always, but the elements are falling into place for more income and spending.
Workers are expecting incomes to rise faster. The level of Job Openings and Quit Rates support this view. With companies seeking a near record number of job positions to be filled and the confidence of worker mobility to quit their jobs for better income offers imply that wages will accelerate higher from the trough they have been in the past 6 years.
As we have outlined Oil prices and sentiment are significant metrics to monitor. Assuming our expectation that Oil will enter a new trading range from the 30’s to the 60’s then we would expect elevated sentiment, spending, earnings and higher incomes to boost stocks prices.
Despite the Nasdaq testing its Tech Bubble highs of 15 years ago (with real earnings this time) and most stock indexes approaching a “tripling” of prices from their 2008 lows, there are few signs of excessive overbought levels both medium and long term. The above Nasdaq futures chart reveals some near term resistance at hand, but as long as earnings bounce back in the 2nd quarter we should expect a continuation of the up trend.
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