Would Stocks Go Higher?

8 May 2013

Introduction

Many have been waiting for the stock market to correct its prices but so far,  it never happen;  instead,  the stock prices have been going higher and higher. Lets examine why.

Monetary Policies

 

We all know that US,  Europeand Japanese central banks have monetary policies that said to have the effect of stimulating the economies.  The central banks have been buying assets trying to inject large amount of money into the markets with a presumption that the money would eventually find its own way to the economy.

Is It Working?

According to the Now and the Future that monitors the key statistics of US economies,   the Fed's present monetary policies did not work for the USeconomy.

The chart of "Money supply M1, M2, M3"  clearly shows that the M1 and M2 money supplies have been declining since mid 2011 whereas the M3 supply has been increasing steadily after early 2012. The M2 is a key economic indicator whereas M3 supply includes M2 plus large and long-term deposits that belongs mainly to the banks and institutions. 

Further,  the velocity chart which tracks the speed of money through the economy has been  decreasing ever since mid 2008.  In short,  the money intended to stimulate the economy has never found its way into the economy as expected. 

Why Stock Prices Are Rising? 

The "printed money" presently enriches only the banks and institutions. They have been buying up the stocks.  This is because USDollars,  bonds and commodities are not attractive at the moment.  USDollar has been suppressed and depreciating ever since monetary policies were implemented;  on the other hand, bonds have negative returns because the yields of most countries are at record low.  As for commodities,  the prices has plunged since early 2011.  What is now left is the stock market which have been rising since March 09. 

Isn't Stock Market Overpriced?

The stock prices of the present market are slightly higher than the mean average as reflected by the Shiller's PE10 shown here

The present Shiller PE ratio is 24. Though the PE ratio is higher than the mean or median,  it is still way below the max of 44.20 recorded before the dot.com bubble.  In other words,  the Banks and Institutions who are flushed with printed money is presently perceiving that there are still rooms for stock market prices to climb.    It is however viewed that the greedy market players will continue to lift the price of stock market to a point until Fed starts to unwind its monetary policies or increase the interest rates.

Update 1: 11 May 2013

There are signs that some indexes such as the Bank ($BKX) and the Nikkei have peaked and is developing further signs of market crash ahead.

References
DOW Peaked?