The Standard & Poor?s 500 Index has gained about 15% since early December and most other major benchmarks have made solid gains. At some point, this 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 globalisation 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.
The Savings Story: People are putting money aside again. 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.
The Inflation Story: All the ?quantitative easing? is bound to cause high inflation rates at some point, and 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. Investors will switch to real assets.
The Takeover Story: Rising Bric giants are going to need technology and brand names, and they will want to buy them.
The Shareholder Story: Over the last decade, chief executive officers loved to talk about shareholder value. Mostly it was just nonsense. Now that is about to change. The only place that companies will be able to get capital will be from their shareholders. In return, they will have to be rewarded with higher dividends and stock prices.
All we need is for Goldman Sachs 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.