une 9 (Bloomberg) -- Plenty of people will dismiss the
recent stock-price recovery as a dead-cat bounce. Even more will
call it a bear-market rally.
Yet as equity prices creep higher, the bears may soon have
to concede defeat. The Standard & Poor’s 500 Index has gained
about 15 percent since early December and most other major
benchmarks have made solid gains in the same period. At some
point, it will become known as the 2009-2013 bull market.
Only one thing is missing: a story. A real bull market
needs a simple narrative that convinces investors that equities
are worth double what they were valued at only a few months ago.
So what could be the story this time around? There are four
plausible candidates: rising savings, accelerating inflation, a
takeover boom, and the scarcity of capital.
Markets need stories as much as any Hollywood scriptwriter
does. Stock prices go up, down and sideways for reasons we will
probably never quite figure out. Human brains find that hard to
handle, so we like an easy explanation that puts things in
order. Chaos and randomness are the scary alternatives.
During the bull market of the 1990s, we had the dot-com,
New Economy story to explain the surge in stock values.
During the 2003-2007 bull market, we had globalization and
the emerging markets of Brazil, Russia, India and China.
And for the next bull market? Here are four “stories”
that could be used to justify it.
Save Money
The Savings Story: People are putting money aside again.
The U.S. savings rate in April jumped to 5.7 percent, the
highest rate for 14 years. Michael Darda, chief economist at MKM
Partners LP in Greenwich, Connecticut, estimates it will reach 9
percent, compared with a low of minus 2.7 percent at the peak of
the housing boom. There’s no mystery about that. Households,
much like banks, are repairing their balance sheets, and they
can only do that by saving more.
The same will probably be true of other heavily indebted
economies such as Britain. All that saved money has to go
somewhere. With interest rates close to zero, there’s no point
keeping it in the bank. Instead, a wall of money is about to
descend on the market, creating huge demand for equities.
The Inflation Story: Central banks around the world are
following the policies of “quantitative easing,” or what used
to be known as printing money. At a certain point, it is bound
to cause high inflation rates, or at the very least an investor
fear of surging prices. It may already have done so.
Real Assets
You don’t want to be holding cash while inflation makes it
less valuable by the day, and central banks keep creating more
of the stuff. Instead, investors will switch into real assets
that can hold their value, such as stocks, real estate or
commodities. Equities are the simplest to trade, and more demand
equals higher prices.
The Takeover Story: The last rally was all about the
emergence of the BRIC economies. This one will be about them
buying North American and European assets. The rising BRIC
giants are going to need technology and brand names, and they
will want to buy them. That is already happening -- Russian
interests just acquired a big stake in General Motors Corp.’s
European unit Adam Opel GmbH.
Expect a massive takeover boom as the BRIC giants clamor
for the prizes. They will end up paying a premium for trophy
assets, another good reason to push up the value of equities.
Access to Capital
The Shareholder Story: Over the last decade, chief
executive officers loved to talk about shareholder value. Mostly
it was just nonsense. CEOs didn’t need stockholders because
capital was easily accessed from banks or the bond market. If
that didn’t work, they could get a friendly private-equity firm
to buy them out, or pay a crazy price for a unit. Shareholders
were about as influential as the cleaners or the secretaries,
and ranked about as high in corporate priorities.
Now that is about to change. In the coming years, capital
will be in short supply. The only place that companies will be
able to get it will be from their shareholders. In return, they
will have to be rewarded with higher dividends and stock prices.
Now all we need is for Goldman Sachs Group Inc. to pick one
of those stories, put it into every research note, and this bull
market can get some real momentum.
Who knows, investment bankers may be out buying Bentleys
again this year if this rally has legs.
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