INSEAD Expert: Stocks Are Rising, But There Is No Bubble

Wednesday, 29 May 2013 08:17 AM

By John Morgan

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U.S. and European stock markets have been rallying purely and simply because of positive financial developments, not because they are in the clutches of a perilous investment bubble, according to an analysis by Theo Vermaelen, a professor of finance at the INSEAD global business school.

Vermaelen noted U.S. and European stocks have increased a combined 30 percent in the past 12 months, despite high unemployment and low growth.

"So is the stock market simply a casino unrelated to the 'real economy?'" he asked in a Forbes column. "Not really ... A more reasonable explanation is the fact that recently there has been a lot of good news (or no major bad news)."

Editor's Note:
Billionaires Dump Stocks. Prepare for the Unthinkable.

Among the positive factors cited by Vermaelen are:

• There has been a decline in the credit spreads of government bonds issued by some EU countries such as Greece, where interest rates on government debt have plummeted from 30 percent to 10 percent. "The collapse of the euro seems much less likely than it was a year ago," he concluded.

• European politicians are actually adhering to their austerity plans.

• In the United States, President Obama has been unable to increase dividend tax rates from 15 percent to 43 percent, which is positive for stock investment.

• Also in the United States, long-term interest rates and inflation remain surprisingly muted despite the Federal Reserve's ultra-loose monetary policy.

• Retail sales are on the upswing. "Perhaps forecasters ignore the fact that many U.S. consumers own stocks and feel wealthier today," Vermaelen wrote

• Finally, a record amount of money is being plowed into share buybacks by U.S. firms, which is generally regarded as a bullish sign.

The Conference Board's U.S. consumer confidence index rose to a five-year high of 76.2 in May from an upwardly revised 69.0 in April.

Consumers are "considerably more upbeat about future economic and job prospects," said Lynn Franco, director of economic indicators at the Conference Board.

"Back-to-back monthly gains suggest that consumer confidence is on the mend and may be regaining the traction it lost due to the fiscal cliff, payroll tax hike and sequester."

But the consumer confidence index is still considerably below the levels expected in an improving economy, MarketWatch reported. Before the 2008 economic crisis, consumer confidence was closer to the 100-point range.

Editor's Note: Billionaires Dump Stocks. Prepare for the Unthinkable.

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