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Source: ONE News -
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When is the news so bad it's good?
It sounds strange and slightly counter intuitive, but for the moment at least, it seems that the worse the economic outlook gets - in the US in particular - the better it is for global stocks.
Why is this?
Well, firstly, and perhaps most significantly, the economy in the US has deteriorated to such a point lately that investors are now betting it is a given the US Federal Reserve will step in and stimulate growth through a second round of so called
Quantitative Easing or money printing.
For much of the year it seemed that US economy would probably muddle through on its own without the need for another bout of QE which, remember, is a very unusual and desperate measure for a Central Bank to take.
It's also arguably the last bullet in the Fed's gun.
Listed companies in the US will welcome another round of significant monetary stimulus as it will bring down borrowing costs even further and hopefully give a much needed boost to consumer demand.
Especially since a second round of US government fiscal stimulus is unlikely ahead of their mid-term elections in November.
US Dollar
At the same time, all this speculation of more monetary policy easing by the Fed has helped push down the US dollar.
This in turn helps further boost the profitability and competitiveness of the many US listed companies which earn money overseas. Think Coca Cola, 3M or Kraft.
In addition, stocks with strong dividend streams are attractive now as they provide a good way of getting regular returns when interest rates on bonds are so low.
Harder assets like stocks, gold and commodities are also are a bit of a safe haven play at the moment in the face of devaluing currencies.
And let's not forget that the balance sheets of the corporate world are also, unlike households in the West, in very strong shape given all the debt repayment and efficiency gains of recent years.
So given all those factors, it is perhaps not quite so surprising that since the start of September, stock indexes in the US have jumped around 10%.
NZ stocks
There have been gains too in New Zealand with the NZX 50 up around 5% in September.
Like the US there have also been some counter intuitive things going on with our stocks too.
Retail stocks like The Warehouse, Pumpkin Patch and Kathmandu have made good gains lately despite economic data showing the retail sector is still very subdued.
So what's causing investors to back retail stocks?
One reason could be that they too are benefiting from the weak US dollar which is pushing up the New Zealand dollar.
A kiwi dollar over US75 cents will reduce the cost of imports for many retailers, something that will help to bolster tight margins.
In addition, stocks with exposure to the Australian market could be benefiting from the kiwi's relative weakness versus the aussie.
On last thing to consider, though, is what happens if some good news comes through on the US economy and the Fed doesn't actually follow through on its hints of QE?
Has a second round of money printing already been assumed in the current value of stocks?
If the Fed was to hold fire, then it might end up being a case of the news being so good it's bad for stocks.
Go figure.
