A mug’s game

Predicting the course of the stock market generally is a mug’s game.

Very few, in fact almost no one, has been able to do so with any degree of consistent accuracy. There simply are so many variables that it is extremely difficult to put all the elements all together. The old adage that fools go where angels fear to tread may be applicable.

Yet, nevertheless, this columnist will try to beat the odds and attempt to tackle this difficult task.

A recent article in Toronto’s The Globe and Mail stated the North American economy at last is experiencing a full, typical economic recovery. Perhaps, one should say, “Do not rush to judgement.”

The deal in the United States over a government spending and taxing for the coming year entailed a sigh of relief. Still, that nation, rather unlike Europe, has yet to face a crisis head on. To quote The Economist the United States now has the biggest structural (deep-seeded) deficit in the world except for Japan.

It will become an outlier in its failure to deal with the fiscal components of an aging population. Its aging is slower than Europe’s but as debt piles up and business and consumer confidence is dampened, the eventual crunch will be more painful. Politicians may claim the agreement will keep the U.S. economy off the shoals of trouble, but few can support that thesis.

With this background, it is appropriate to consider the fundamentals of the stock market. Shares in the U.S. market are trading at 21 times current earnings, far above the usual low of five or six, and 50% above the 1929 level.

Morgan Stanley’s experts state all assets are more expensive than last year. The strong upward move in 2012 was driven by the low yields artificially created by the Federal Reserve’s efforts to keep interest rates at unprecedented low rates to spur the economy.

At some point interest rates must revert to their usual pattern, and then the house of cards will come tumbling down.

If those interest rates persisted, all kinds of asset bubbles would develop as they did in the previous decade. Then it was technology companies that soared, but more likely it would be divided-paying shares that are far above reasonable norms.

Furthermore, if these Federal Reserve measures continue, it clearly would lead to higher commodity prices that would erode corporate profits. Projections for significant gains due to sales improvement from here is improbable and productivity gains no longer readily available.

The U.S. dollar is obviously overvalued, evident in the recent $48-billion deficit in foreign trade, which will discourage foreign investors.

Hence, it is difficult to see the factors leading to a strong equity market. Perhaps pundits such as this columnist will be vindicated.


Bruce Whitestone