Question of the Week!

QUESTION OF THE WEEK

by RM Group of Richardson GMP


Global markets have done very well so far in 2013.  What have been the driving factors?  

Indeed, most major exchanges have moved higher in 2013, but there are many factors contributing to this strength. We’ve already discussed the influence of stable Eurozone sovereign debt yields in our Chart of the Week. Again, we stress the inability to fund government debt scares investors away in droves! In addition to the sovereign yields, we can also add 1) solid money flows into equities since January, 2) strong U.S. housing and employment data, 3) reasonable data out of China including stable industrial production and rising exports, and 4) continuing monetary policy support from most of the world’s central banks.

In addition, we would point out a factor that isn’t really being talked about much and that is the lack of news out of Washingoton D.C. Many of you may recall that markets became very nervous at the end of 2012 due to the possible impact of the "fiscal cliff” which was averted at that time; however, when it comes to budgetary matters in the U.S., no news apparently means good news for stock markets. We are not political analysts, but it has become very clear that the Republicans on Capitol Hill are divided and that the party is fractured. House Speaker John Boehner (Republican) is in a very difficult position as he has been unable to influence some of his members who are adamantly opposed to tax increases. Because he does not have unanimous support from his own House members, he has very little political capital to use in negotiating with the President at the moment. In fact, there has been some discussion that if a budgetary bill went to the floor that included tax increases then John Boehner could lose his job as speaker. This inability to forcefully negotiate has caused the Republicans to step back until they are in a better position to discuss budgetary terms that would be more favourable to the majority of the Republican Party. However, that could take a very long time.

Naturally I suspect you’re asking "can we keep up this market strength?” First, I’ll say that most investors would agree that the current rate of market appreciation is unsustainable. Second, any of the factors listed above that support the bulls can easily reverse course, with the exception of central bank support, and result in profit taking. So it is quite possible that markets could pull back in the near term, but for the time being the market is telling us that it likes what it sees in 2013.

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