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Selling the Rallies

Chemical companies, Economic growth, Financial Events
By Paul Hodges on 05-Jul-2011

Index Jul11.png

There was a sustained rise in the number of wealthy Western BabyBoomers entering their peak consumption years between 1980-2000. In turn, stock market multiples rose (the US Dow Jones price/earnings ratio rose from 8 to 32), as investors valued earnings more highly.

‘Buying the Dips’ in the market became the easy way to make money.

Since 2000, the Boomers have been leaving the 25-54 age group, and entering the 55+ cohort, when people typically spend less and save more. As a result, financial markets have been held aloft by central bank liquidity programmes, rather than fundamental demand.

So far, this support effort has had one great failure between Q4 2007 – Q1 2009, captured in the IeC Boom/Bloom Index above (blue column). Sentiment ebbed away, as major financial houses began to collapse.

But then the Index recovered again, as central banks and governments added even more stimulus and liquidity to the markets. It dipped in Q2 last year, when it seemed these measures might end. But Greece’s problems soon led to more support.

The Index is not designed to tell us when fundamentals will re-emerge as the major driver. But the Austerity measure (red line) is acting as a reminder of this underlying reality.

When this happens, ‘Selling the Rallies’ will be the key investor strategy.

Are we now at a turning point? This month’s Index suggests we should be very careful. The Index itself dropped, whilst the Austerity measure rose strongly. The blog will continue to watch developments very closely.

New blog readers can find the Index methodology by clicking here.