Tuesday, 3 November 2015

Stocks extend rally but long-term trends could be about to reverse on demographic change

Global stock markets mostly continued their rallies on the first trading day of November.

The S&P 500 rose 1.2 percent to the highest level since 10 August. It is now just 1.3 percent below its all-time high. The Nasdaq 100 also rose 1.2 percent to its highest level since 2000.

The Stoxx Europe 600 rose 0.3 percent but the MSCI Asia Pacific Index fell 1.1 percent, the most in more than a month, on Chinese data which showed manufacturing contracted again last month.

Still, Monday's performance suggests the bull market may still be alive, a bull market that a Bloomberg report says has benefitted Wall Street much more than Main Street.

In a report sent to clients on Sunday, Bank of America Corp. strategists totted up the results of 606 global interest-rate cuts since the collapse of Lehman Brothers Holdings Inc. and the $12.4 trillion of central bank asset purchases following the rescue of Bear Stearns Cos.

The results represent a clear victory for Wall Street over Main Street, according to the team of Michael Hartnett, BofA’s chief investment strategist.

For every job created in the U.S. this decade, companies spent $296,000 buying back their stocks, according to the New York-based bank.

An investment of $100 in a portfolio of stocks and bonds since the Federal Reserve began quantitative easing would now be worth $205. Over the same time, a wage of $100 has risen to just $114.

However, another Bloomberg report suggests that things may be about to change.

[A]ccording to Charles Goodhart, professor at the London School of Economics and senior economic consultant to Morgan Stanley, demographics explain the vast majority of three major trends that have shaped the socioeconomic and political environments across advanced economies over the past few decades. Those three would be declining real interest rates, shrinking real wages, and increasing inequality...

So what now, as the conditions that fostered these long- decades-defining demographic trends dissipate?

As dependency ratios rise, with a greater share of retirees relative to workers, "all three trends could reverse," argues Goodhart.

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