When the stock market went off a cliff last summer, the big question was whether we were seeing the beginning of a long-term bear market, or just a pause in the ‘sideways’ equities trend of the last decade.
A long-term bear would be a new phenomenon for the developed world.
If you pull up a chart of the Dow, FTSE or S&P 500 going back to the 1970s you will see that there was a bull market starting then which stretched till 2000.
This bull market was driven firstly by deregulation of Western economies - including privatisation - followed by a peace dividend from the end of the Cold War. It finally terminated with the technology boom driven by long-term gains of companies like Microsoft, Intel, and Cisco, which suggested that tech stocks could rise 10, 20, 50 times from their IPO price in a decade or so.
The final terminus of this boom was inflated by the emergence of the Internet and thrown into terminal orbit by the ‘Y2K’ scare.
Since then, the market has been trading sideways.
From a technical analysis point of view the summer crash of 2011 was particularly worrying because it could have indicated the markets were going to head into a Japan- style slump that might last 10 or more years.
This would have been disastrous for Europe and the US.
However, as Bernanke keeps hinting, inflation is not hard to create. A helicopter dropping $100 bills over cities is one way to create inflation but for central bankers the technique is called Quantitative Easing or ‘QE’.
Printing money is the cure for deflation and that is what’s been happening.
These money-printing manoeuvres by the European Central Bank (ECB), the Bank of England and the Federal Reserve have ended up pumping money into the stock market - the first stop of reflation before the new money hits the ‘real’ economy.
This has pulled the stock market back from the brink.
The question now is not whether we are in a new long-term bear or even whether we are back into the sideways channel of the last decade or so, but whether this is the beginning of a new bull market.
Developed world markets are extremely cheap when compared to the valuations of developing markets. Meanwhile, there is a giant pipeline of pent up money supply, bottled up in the developed world’s banking system. A release of this liquidity -by design or by mistake - would see a wave of money flood straight into equities.
In this new economic world driven by giant interventions outside of the normal operation of economics, it is policy and money flow driving the market. As such, the scene looks set for a ground breaking rally.
With America recovering, the tide of the long recession kicked off by the credit crunch may turn quickly. Consequentially, the Titanic liquidity operations created by governments of the developed world will quite likely accelerate this process and create a dynamic equity market which in its way will produce as many new problems as it resolves old.
The holders of stock however will undoubtedly rejoice whatever the consequences, as one thing is for sure, no one questions a bubble when it is inflating.
If these equity rallies continue all year, as I believe is likely aside from the predictable ‘summer glitch’, then stock markets will be indicating that a new cycle for the world economy will have begun.
* Clem Chambers is CEO of leading stocks and shares site ADVFN.com
and author of 101 Ways to Pick Stock Market Winners.