2017 a year of booming stock markets, but is there a disconnect?

2017 was a good year, and also demonstrated the biggest error that the bears have been making for years. The challenge lies with how the fruits of the success are distributed.

Article updated: 27 December 2017 12:00pm Author: Michael Baxter

2017

Stocks and GDP

For stock markets, 2017 was quite the year. In the US, the S&P 500 rose by 20 per cent, breaking more records than you can shake a stick at. The FTSE 100 was up too, not quite like other stock indices, but all the same, managed to grow by seven per cent, and in the last trading day before Christmas, closed at a new all-time high. The FTSE 250 did better, up by around 14 per cent. But the real star of the show this year was the NASDAQ Composite, up by almost 30 per cent.

It is not hard to see why the NASDAQ has done so well, it has been led by the techs. And that brings me to my stock of the year, but maybe stock of the decade would be a better description. The Amazon share price rose 52 per cent this year, up 380 per cent in the last five years. By contrast the Apple share price rose by 45 per cent in 2017.

It was also a year of incredibly low volatility, with the VIX, which tracks the moving average of the S&P 500, seeing an unprecedented run of low readings. The VIX is also known as the fear index. Well, the markets have never been so unafraid.

Bubbles

All this leads some to speculate that bubbles are forming. Well, there may well be a mighty bubble in bitcoin, although I won’t consider this to have burst until the price falls to less than one per cent of the current price. But I see no bubbles in stock markets or indeed techs. Sure, valuations are high ‘ish’, but not at the kind of levels that have precipitated a crash in the past.

Human nature is a funny thing, you can never say for sure how Homo sapiens will react en masse, but the fundamentals do not seem so alarming.

Politics

Of course, in the UK, the government suffered a self-inflicted wound. The decision to call the election turned out to be even more fool hardy than running in fields of wheat.

But I would say that 2017 marked a victory for liberals, with the defeat of the Far Right in Holland and France, with Angela Merkel winning again - although she may have to call another election, forming coalitions has not been easy for her. But the victory of Macron felt to me like a Trump backlash - it also felt like a victory for planet earth and the forces of global cooperation versus isolationism.

Mr Trump has not ceased to amaze me - in a horrific kind of way.
Michael Baxter

 

The bear error

Of course there have been no shortage of predictions of doom - the doomsayers who have been saying record low interest rates and QE have created one all mighty stock market bubble that will burst just as rates start to rise. Well in the year that saw the FED increase rates several times and the Bank of England increase them once, markets boomed.

The anti-low interest rates doomsayers miss the point. Interest rates were so low because the economy was awful - that is why there is minimal risk of surging inflation. They are now rising because the economy across the so called advanced world is stronger than it has been for years. This is hardly reason to panic.

Disconnect

But there is an odd disconnect. I see it in the US, where President Trump says he is dealing with inequality by cutting taxes paid by the rich. I see it in the UK, where real wages are falling.  In fact, look deeper at the stats on the UK economy and you find that GDP per capita - that’s per head - has risen by just 2.4 per cent since the end of 2007. By contrast GDP is up 9.7 per cent.

There is a disconnect between what the markets are saying and how average people are doing.

The rise in the techs is part of the problem - no wonder so many tech billionaires are sounding so guilty and talking about universal basic income. Anti Silicon Valley is part of the Trump narrative, Silicon Valley and Trump seem to be ideologically at polar extremes.

Then there is the UK economy. It’s been an awful year, with the UK relegated from being one of the fastest growing economies in the G7 last year, to one of the worst this year.

Stock markets and the economy do move in alignment eventually - the US and euro area are looking good, even Japan is strong by its standards - the UK needs to do better in 2018.


These views are those of the author alone and do not necessarily reflect reflect the view of The Share Centre, its officers and employees  

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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