"What goes up must come down" may not be strictly true in business. But when stocks bounce from record to record for this long, some people are bound to be asking, "How long can it last?"
Perhaps it would be more reassuring if we were convinced that rising stock prices were based on fundamentals. Instead, market valuations seem to have been rising almost completely disconnected from struggling economies.
Maybe the end is in sight. A new statistic pointed out by the Wall Street Journal this week shows companies have stopped buying back their own shares.
That is worrying, because who knows best what shares are worth than the executives who run the companies? It's also worrying because of who isn't worrying — which is just about everyone else.
Dealing with the madness of crowds
The great masses of investors seem gripped by what the Financial Times calls in a front page story "excessive market euphoria," quoting high-profile hedge fund managers. And it seems that as with previous periods of euphoria, like the U.S. stock and housing bubble, and the housing booms in Britain and Canada, even the smart money is afraid to bet against what may be the madness of crowds.
Mad as it may seem, markets can rise and rise in the face of fundamentals telling them they are moving into crazy territory, and the ground is littered with fund managers who got out of frothy markets too early, then stood weeping on the sideline as the real gains arrived.
But we may be reaching a watershed.
Economy seems to be recovering
In the U.S., economic signals have been all over the place. Growth, as measured by GDP, has been shrinking. But U.S. jobless data came as an Independence Day birthday present, indicating the exact opposite. Job creation soared and the unemployment rate plunged to 6.1 per cent, its lowest level since 2008.
Yesterday we got to see what the members of the powerful Federal Reserve committee talked about at last month's meeting. They all agree that the Fed will completely stop buying bonds to stimulate the economy in October. But they seemed divided on whether the U.S. economy was in danger of running too hot or too cool.
Of course that meeting was before they knew about the bumper crop of jobs. Next week U.S. central banker Janet Yellen will offer hints about what the committee thinks now. As I warned about a year ago, stocks (and Canadian house prices) are driven by rock bottom interest rates. Perversely, economic weakness has just pushed prices higher.
Could solid signs of growth have the opposite effect?
Real estate, debt and interest rates
Here in Canada, markets and real estate have also been hitting new records despite insipid growth. Moody's has warned our largest province to cut back on spending. The same company warned that Canadian banks were riskier. Our own central banker Stephen Poloz has compared our economy to a cracked tree, perfectly fine as long as outside forces don't snap it off at the weak point. Despite all that, Canadian stocks continue to do well.
There have been good reasons for optimism in Canada. Oil has surged on renewed fighting in Iraq. As Poloz well knows, Canadian firms are more profitable when the Canadian dollar is low.
On Friday, Statistics Canada releases its latest jobless numbers, providing one more indication whether the Canadian economic resurgence is real or imaginary. But even that silver lining may have a cloud. Good job numbers are sure to push the loonie, currently hovering around 94 cents US, even higher as Poloz is forced to think harder about when to raise Canadian interest rates.
And speaking of ever higher prices in the face of fundamentals, on Monday the Canadian Real Estate Association releases house prices and sales.
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