US stocks hit record highs but outlook turning negative

Stocks in the United States rose last week, their fifth consecutive weekly gain, with benchmark indices hitting new record highs.

The Standard & Poor’s 500 Index rose 1.2 percent to 2,063.50. The Dow Jones Industrial Average rose 1.0 percent to 17,810.06.

Elsewhere in the world, the STOXX Europe 600 Index rose 2.9 percent but the MSCI All-Country Asia Pacific Index fell 1.3 percent.

Markets were boosted by actions by central banks last week.

The People's Bank of China announced on Friday that it was cutting one-year benchmark lending rates by 40 basis points to 5.6 percent and one-year benchmark deposit rates by 25 basis points to 2.75 percent.

Also on Friday, European Central Bank President Mario Draghi told an audience of bankers in Frankfurt that “we will do what we must to raise inflation and inflation expectations as fast as possible”, raising investors' expectations of further monetary stimulus.

Stocks are likely to continue to rally in the next few weeks as we approach the end of the year, traditionally a period in which markets do well.

However, further upside could be limited as stock valuations are already very high.

In a commentary on 13 November, the Federal Reserve Bank of San Francisco noted that the cyclically adjusted price-earnings ratio for the S&P 500 was 25.7, exceeding the long-run historical average of 16.6 and implying mildly negative real growth in stock prices over the next 10 years.

Furthermore, the ratio of New York Stock Exchange margin debt to GDP has risen to near all-time highs, and that similar sharp rises in the ratio in 1999 and 2006–07 were followed by major downturns in stock prices.

Nikkei 225 falls as Japanese economy contracts

The Nikkei 225 plunged 3.0 percent on Monday after the Japanese government reported that the economy contracted 0.4 percent in the third quarter, the second consecutive quarterly contraction.

However, US investors shrugged off the news. The S&P 500 rose 0.1 percent on Monday to close at another record high.

Stock markets survive turbulent October

Stocks rose last week, with stock indices in the United States in particular hitting new all-time highs.

The Standard & Poor's 500 Index rose 2.7 percent last week to 2,018.05 while the Dow Jones Industrial Average jumped 3.5 percent to 17,390.52, both achieving new record highs. The STOXX Europe 600 Index rose 2.9 percent while the MSCI All-Country Asia Pacific Index rose 3.1 percent.

Stock markets slipped on Wednesday after the Federal Reserve announced the end of its bond-buying programme but this event was offset by the announcement from the Bank of Japan on Friday that it was raising its annual target for asset purchases to around 80 trillion yen from 60-70 trillion yen, which helped boost stocks at the end of the week.

The diverging moves from the US and Japanese central banks highlight the divergence in the direction of their economies. While a report last week showed that the US economy grew at an annual rate of 3.5 percent in the third quarter, the BoJ's economic outlook report released shortly after its monetary policy decision last week showed that it had lowered its growth forecast to 0.5 percent for the fiscal year ending March 2015 from 1.0 percent previously.

The rally in stocks last week means that markets have mostly survived October relatively unscathed. The S&P 500 rose 2.3 in October and the MSCI All-Country Asia Pacific Index rose 1.1 percent.

Europe was the only major region to see stocks fall, with the STOXX Europe 600 declining 1.8 percent.