Stock markets in the United States and Europe have been building up steam for six months and now seem oblivious to still fragile economic growth, but analysts say this does not yet amount to another financial bubble. Markets tend to anticipate trends and most of the signals emerging from the main stock markets in the world are pointing towards "go".
Since the middle of July, the main Dow Jones index on Wall Street has risen by 10.0 percent. Driven by prospects or hopes of economic recovery, it has broken through the 14,000 point level to reach its highest level since November 2007. In Europe, the main index in Germany, the Dax, has surged by about 20 percent since July and is at the highest level since the beginning of 2008.
The French CAC 40 index has made similar gains but is around levels reached in the middle of 2011.
"The market is in the process of making a long-term change of direction," siad Bertrand Lamille, director of investment management at B*Capital, a branch of BNP Paribas bank. "The downward movement for stocks, which has been underway since 2007, is over."
The rise of the markets may be seen more as a process of making up lost ground, given that they had fallen heavily owing first to the financial crisis, and then to the eurozone debt crisis.
Since the president of the European Central Bank Mario Draghi made a watershed speech in July underpinning eurozone countries in debt trouble and therefore also the integrity of the eurozone, "the rise is logical since the prospect of the eurozone breaking up, played up by Anglo-Saxon (British and North American) investors, has faded," said an investment manager at Barclays Bourse, Renaud Murail.
On the sovereign debt market, Spain and Italy no longer have to offer unsustainably high interest rates to borrow as was the case in 2012. Yields on their debt bonds have fallen sharply in the last few months.
At brokers Aurel BGC, economist Jean-Louis Mourier commented: "The rally is broadly justified if one bears in mind the fact that the big risks which hung over the market have been dissipated, in a context in which there is plenty of cash for investment."
Shares are the big gainers, together with the bonds of countries in a weak situation, from the policies of leading central banks which have flooded the markets with hundreds of billions of dollars and euros to avert a crisis of confidence and to stimulate economic activity.
Analysts at PrimeView said that "the abundance of liquidity throughout the world... should now flow towards shares rather towards bonds," noting that low-risk investments such US of German sovereign bonds generate no real return for investors.
Commodity and raw material markets have not yet been affected by any speculative surge. The rise of the price of oil is being contained by plentiful supplies. Demand for industrial metals is subdued owing to weakness of demand for finished products, and gold, a haven in times of risk aversion, could now be in competition with risky assets.
The surge of stock prices could seem to be a paradox given that growth in the United States has scarcely got going and is struggling to gain any momentum in the eurozone.
Mourier warned that "the uncertainties which weigh on future growth justify a pause, or at least that the rate of the rise should slow down." He also noted that there remained a risk that the eurozone could plunge back in to crisis.
But so far, analysts do not see a risk of a stock market bubble. "There is no such risk, as things stand," Murail said.
This analysis appears to be borne out by the ratio of the value of leading stock indices to company profits which is still far below the long-term average.
Lamielle accepted that there was a mis-match between the rise of stock markets and the weakness of growth. But, he said, "the correlation is never immediate, there is always a phenomenon of anticipation on the markets."
He added that investors held that 2012 might turn out to have marked the low point of economic activity, particularly in the eurozone.
Analysts say that the main risk is rooted in how the central banks will manage their monetary policy. "The danger is that the central banks claw back the liquidity," Murail said.
In other words, if investors begin to anticipate the winding down of easy-money policies which are oiling the cogs of economies, they might be inclined to reduce the risks they are prepared to take with the likely consequence that some funds would flow out of stocks and share prices would fall.
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