All-time highs recently seen across the Atlantic for the Nasdaq, Dow Jones and S&P 500 indices suggest that it could once again be party time for US equities. However, Davy’s are warning of markets becoming complacent and that a correction or set back of the order of magnitude of 10% or so is due in the coming months.
Closer to home the Irish government’s Spring statement today is likely to outline a series of spending increases and tax cuts over the next five years. This is the fruit of a number of years of fiscal discipline. This is in stark contrast to the on-going woes of the Greek government as it struggles to find enough cash to meet short-term pay and pension bills.
Pessimists would point to the past, and what happened to markets after the record highs of late 1999 and early 2000, and the subsequent dotcom bubble bursting somewhat spectacularly. The crash wiped off nearly four fifths of the value of the Nasdaq index in just two years, offering a sobering reminder that what goes up can most certainly come down with a bang! The point is particularly pertinent for the Nasdaq due to its tech heavy composition, which was the Achilles heel when technology companies first started to suffer back in 2000. Many of the companies that witnessed both boom and bust around the turn of the century were tech start-ups without proven financials.
However, the constituents of the Nasdaq today are somewhat different to over 15 years ago, as big corporations such as Facebook and Google now sit alongside seasoned veterans of the index such as Apple and Starbucks. Key economic data from the US has recently been positive: unemployment rates continue to fall, GDP growth figures have been making good reading, all of which has led to increased consumer confidence. Couple this with the global fall in the price of oil, which benefits the US consumer more than most due to the relatively low level of taxation at the pump, and it seems like it is time to put on the party hats and start playing the music. Before we ‘get the party started’ there are a few potential grey clouds on the US equity horizon to consider.
Firstly, as the Nasdaq has joined the S&P 500 and Dow Jones in reaching new highs, investors could see this as a sign to sell, arguing that equities are now expensive. Then we have to consider the Federal Reserve and the inevitable rise in interest rates, which could be accelerated by the positive economic data that indicates such a rise could soon be palatable. Lastly, whilst low oil prices have boosted US and UK economies, the reverse could be true as prices start to recover, with OPEC holding a key hand in the supply and demand chain.
The one lesson to learn from the dotcom crash and the subsequent financial crisis of 2008 is that nobody can say with absolute certainty how markets and the economy will react both during and after a major event due to the unprecedented nature. Perhaps we should avoid celebrating too much, otherwise we could be left with an unwanted hangover in the future.
If you don’t think it will happen it is worth reading the story of the of Isaac Newton who went bust when he lost €20,000 in 1720 (€3 Million in today’s money) on a company he mistimed, might be worth reading. http://www.telegraph.co.uk/finance/personalfinance/investing/10848995/How-not-to-invest-like-Sir-Isaac-Newton.html
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