Stocks on the Rise, but with Little Foundation

Posted by | April 19, 2012

Here we are a little more than three years removed from the financial crisis-induced stock market bottom and much has changed.  Well, some things have changed.  For one, the S&P 500 has more than doubled.  So the return side of the risk/return equation has moved significantly.

What about risk?  Certainly some of the risks associated with the market bottom have been addressed.  We don’t have to worry about a big bank going bust tomorrow as we did back in the dark days of 2008 and 2009 (whether or not a few of them should have  is another story).  But is there really less risk in the market these days?

Central Banks worldwide have tripled the size of their balance sheets.  In addition to this being an event without historical precedent, there is the none-too-small matter of increased interest payments when rates eventually rise.

Greece did not default, but it is certainly not out of the woods, while Portugal, Italy, and Spain also find themselves in a heavily wooded area.  The European banks are still highly leveraged and loaded with debt from Portugal, Italy, Ireland, Greece, and Spain.

Corporate profit margins are at a record high with nowhere to go but…higher to new records?

The housing market is still searching for a bottom and unemployment, though improved, is still a drag.

Throw in an Iranian nuclear threat and you start to wonder if risk hasn’t increased since 2009.

So, why have stocks gone straight up off the bottom?  Some say the stock market is forward-looking and has discounted all of the above risks already.   Some say that stocks have been and will continue to be bought because they are cheap relative to bonds (disregarding that bond prices have been and are being held artificially low).

Or, maybe, Central Bank liquidity has provided a backstop for investors, which has encouraged them to invest in the riskiest and relatively (to bonds and cash) cheapest asset available in a search for return of any kind. Expect to see some volatility once the money printing stops and the market is allowed to re-price assets.

Jim is Portfolio 21's Chief Investment Officer.  He has more than 20 years of experience in socially and environmentally responsible investing. 

Post categories: banking, finance, growth, markets, risk

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