Around the world a ravenous appetite for stocks has pushed markets from Austria to New Zealand up sharply over the past month. Responding to the passage of Bill Clinton’s deficit-reduction bill, the Dow itself rose to record heights, hitting 3583 before closing the week at 3569. Even the once ravaged Tokyo stock exchange has experienced a steady recovery; the Nikkei index has risen more than 25 percent since January. Some analysts confidently grabbed the bull by the horns. “It’s the first stage of a long bull market for equities around the world,” says Allen Sinai, chief economist for Economic Advisers in Boston. American investors are among those trying to cash in. Sales of mutual funds investing overseas nearly doubled in the first six months of 1993 to $11.5 billion, according to the Investment Company Institute in Washington.
Don’t be too quick to bet the cookie jar, though. Share prices are looking expensive. In London, New York and Tokyo, they are trading at average multiples close to their historic highs. And with growth still slow in the United States and all but nonexistent in Europe and Japan, it’s difficult to justify such premiums. More than anything, the bull markets are being driven by the lack of decent alternatives: with low interest rates on cash and falling yields on bonds, stocks are looking like the only game in town.
The weakening of Europe’s exchange-rate mechanism (ERM) has also invigorated share prices. Now that the rest of the European Community is no longer lashed to German exchange rates, governments have more flexibility to cut rates to reinvigorate their economies. Britain has been leading the way. Since it withdrew from the ERM last September, British long-term rates have dropped from 12 to 6 percent, and London share prices have rebounded more than 25 percent. “The debate now is really only over the pace of recovery and how it should be reflected in share prices,” says Clive Anderson, an analyst with London brokers Smith New Court.
Not so fast, say more cautious observers. “The mood in the U.K. is one of excessive optimism,” warns Joe Rooney, European strategist at Shearson Lehman in London. And some recent statistics seem to bear him out. Britain’s manufacturing output fell 2.1 percent from May to June, the largest monthly drop in 66 months. And a clutch of major British companies recently released gloomy forecasts.
But investors looking for more than the paltry returns promised by money markets and certificates of deposit don’t have much choice. Despite Federal Reserve Chairman Alan Greenspan’s warning earlier this summer, signs of inflation in America are still as elusive as a ghost. At one point last week the yield on the benchmark 30-year Treasury bond slipped to 6.42 percent, a 16-year low.
That could change by next year, however. One scenario increasingly heard on Wall Street is that if the U.S. unemployment rate doesn’t start falling noticeably before the next congressional elections, Clinton will shift his focus from deficit reduction to stimulating economic growth to create jobs. “He’ll have to jump on the gas pedal hard, and that’s where you’ll get the real inflationary threat,” says Michael J. Howell, director of global strategy for Baring Securities Group. While such an inflationary course would not win Clinton any friends on Wall Street, it might improve his chances of re-election in 1996. As any good investor knows, unemployment rates swing more votes–and politicians–than stock-market indexes.
