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Has a New Bull Market Begun? / Artikel mises.org

verfasst von - Elli -, 11.06.2003, 15:36

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Has a New Bull Market Begun?
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By Frank Shostak

[Posted June 11, 2003]

From its low on March 11, the Dow Jones Industrial Average
has risen 20.5% (see chart), the S&P500 has increased by 23.4% (see chart)
while the Nasdaq Composite has climbed 28% (see chart).

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A sharp fall in the momentum of money AMS (an Austrian
definition of the money supply) adjusted for nominal economic activity mirrors
closely the tighter stance adopted by the Fed. Year-on-year adjusted money AMS
fell from -1.6% in June 1999 to -6.5% in January 2001 (see chart). 

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Now, since January of this year the growth momentum of
adjusted money AMS shows a visible rebound. The yearly rate of growth jumped
from 1% in January to 5.5% in May. An expected lowering of the Federal Funds
rate target this month is likely to strengthen the growth momentum of adjusted
money AMS further. All this should provide strong support for the stock prices
of various non-productive activities at the expense of wealth generating
activities.

Again it must be realised though that a looser monetary
stance can only reshuffle a given pool of real savings. However, if the pool
is stagnant or falling general economic activity cannot increase. Consequently,
no general up-trend can emerge in the stock market. All that can occur are
fluctuations around a horizontal, or declining trend, so to speak.

Various key economic data raises the likelihood that the
stock of real wealth is likely to be under pressure. Thus the consumer
liability - to -assets ratio climbed to a new record high of 0.185 in Q1 from
0.182 in Q4 2002 (see chart). Year-on-year consumers’ real net worth fell by
7.5% in Q1 after a fall of 5.9% in the previous quarter. This was the 4th consecutive
quarterly decline (see chart).

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Moreover, the non financial debt-to-GDP ratio jumped to a
new record high of 1.965 in Q1 from 1.953 in Q4 (see chart). Also, the fact
that the personal income to consumption ratio remains in free fall is another
indication that the pool of real savings is in trouble (see chart).

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The aggressive lowering of interest rates by the Fed has
significantly arrested the pace of liquidations of past excesses. This in turn
continues to maintain pressure on the sources of real growth. In short, the
existence of non-productive activities constitutes a drain on these sources.  In
this respect, the production of durable consumer goods-to-non-durable consumer
goods ratio eased to 1.13 in April from 1.14 in March. This must be contrasted
with an historical average of around 0.7 (see chart). The ratio of business
equipment production - to - non-durable goods production was unchanged at 1.02
in April from March against the historical average of 0.6 (see chart). In
other words, the liquidation of past excesses has barely begun. Obviously then
no sustained economic recovery can emerge while the source of real funding is
under pressure.

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Despite the sharp fall over the past three years stock
prices still remain expensive. Thus the trailing P-E ratio of the S&P 500
stocks (using reported earnings) stood at 34.55 in May against 33.23 in April.
This is way above the historical average of 18 (see chart). The dividend yield
on S&P500 stocks fell to 1.72% in May from 1.78% in the previous month (see
chart). This must be contrasted with an historical average of 131 years of
4.6%. 

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The Fed’s determination to counter deflation by a likely
intensification of monetary pumping in the months ahead will undermine the
stock of real wealth further. While this may temporarily lift the stock market
the overall downtrend in the Dow Jones Industrial Average (see chart) and the
Nasdaq Composite (see chart) that begun three years ago is likely to remain
intact.

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In this regard there are a lot of similarities with Japan as
far as the low interest rate policy is concerned. Despite the relentless
lowering of interest rates, which are currently at around zero, stock prices
in Japan have been trending down for over twelve years now (see chart).

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To conclude then, it is quite likely that businesses'
ability to generate real wealth has been severely impaired. This in turn
precludes the possibility of a sustained economic recovery and thus the
emergence of a durable up-trend in stock price indices i.e. new bull market.
An expected loosening in the monetary policy of the Fed is likely to further
aggravate the state of the real economy and the stock market.

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Has a New Bull Market Begun? / Artikel mises.org - - Elli -, 11.06.2003, 15:36