Since the recovery from the worldwide financial meltdown commenced in 2009, global stock markets have closely mirrored international economic fundamentals: lots of false hopes and liquidity-driven bouts of enthusiasm followed by regular sharp corrections. The recovery has been sluggish, at best, and stock market rallies have lacked a solid foundation. On balance, the Global Dow Jones index has been in a holding pattern, trading in late 2012 very close to where it stood three years ago.
Individual markets have been extremely uneven—which is also true of the global economic recovery. It used to be that whenever the United States sneezed, the rest of the world, and especially emerging economies, caught pneumonia. From 2009 to 2011, however, China jumped-started its economy well ahead of the rest of the world. It became the world’s largest market for motor vehicles, leapfrogging the depressed U.S. and helping sustain the crucial automotive industry in North America and Western Europe.
Insatiable demand for commodities from Chinese manufacturers also helped oil, metals and food exporting nations around the world to grow strongly.
Rich Country Malaise
Overall, emerging economies have outperformed rich countries on the road. Over the past four years economies such as Brazil, India, South Africa, Russia, Turkey and Indonesia have come into their own.
At the same time, rich industrial nations have underperformed. Japan has now sunk into perpetual stagnation and few analysts expect anything from its economy or stock market. Europe has become split into creditors and debtors, with disastrous consequences for the economies of the southern periphery, which have entered an open-ended recession. The Madrid and Milan stock market indices lost half of their value between early 2010 and mid-2012. The FTSE MIB index in Milan is down some 75% from its 2008 peak.
Until late 2012, Germany had benefited from the euro-zone crisis. Money that fled from debt-ridden countries found a new home in Germany. German borrowing costs fell to zero, and the weakness of the single currency stimulated German exports outside the euro-zone, making up for soft demand in Europe. The DAX index in Frankfurt has held up well over the past three years, and so did the Stoxx index of 600 largest European multinationals, which are mostly based in Germany, France and other Northern countries.
Then there is Wall Street. Despite a decidedly lackluster economic recovery, high unemployment and a depressed real estate market, the Dow Jones Industrial Average rose to nearly 14,000 in October 2012, coming within striking distance of its 2008 all-time high. The technology-heavy NASDAQ Composite index surpassed 3,000 at the same time and traded at its highest level since the dot-com bubble burst in March 2000.
Only after the Nov. 6 presidential election did investors become sufficiently worried about the so-called fiscal cliff—the automatic spending cuts and tax increases at the start of 2013—to head for the exits.
Lack of Conviction
On balance, Wall Street has performed well. It gained 40% between mid-2010 and October 2014, and even after the October-November correction its level was twice that of early 2009. Investors and savers have seen their battered holdings of mutual funds, pensions and college savings rebound, once again indicating that stocks—especially blue chips—are safe investments.