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It was hard to ignore the swells in yesterday’s U.S. stocks that took place in response to speculation of global policy makers’ possible plans for economic growth stimulation. However, the US wasn’t the only country to see its stock prices move up so aggressively. CNN reported China’s overseas investments surged to more than $21B, as state-owned companies obtained various global resource-related assets.

A report compiled by private equity firm A Capitol revealed that Europe’s delicate state continues to capture the attention of Chinese companies. Drawing them to the scene is undoubtedly the alluring possibility of obtaining equity at undervalued prices. In fact, China’s second largest destination for investment is Europe; which accounts for 16 percent of outbound mergers and acquisitions.

This number has actually fallen from last years reported 37 percent, due largely to a shift in capital interest towards the realm of resource-related assets. One of China’s largest European investments lies in Thames Waters Company, the UK’s largest water and wastewater treatment establishment. Though the exact amount of appropriated equity isn’t known for sure, the investment is valued at about $778B.

With all of the ongoing stresses about Europe’s faltering economic state, it would be easy for one to find solace in knowing that the world’s second biggest economy had its back in a big way. But, then we start remembering, wait a minute, isn’t China’s economy losing footing themselves?

Yes, but this morning the WSJ’s Market Watch brought good news of interest rate cuts in China, information that will undoubtedly ease fears of the country experiencing a slowdown in economic growth. In a statement the People’s Bank of China posted on its website, it was announced that starting June 8, they will lower benchmark one-year lending and deposit rates by 0.25 percentage point.

An economist from Credit Agricole, France’s largest retail banking group, projects the move to be indicative of policy makers “bringing out the big guns.” He explains further the real impact of the reduction will be most prevalent in sentiment amongst businesses, domestic consumers, as well as the markets.

Economist Mia Hong explains that since the focal point of China’s financial reform is interest-rate liberalization, tomorrow’s change will be a near bull’s eye move for shifting things in that direction. She also forecasts the lowering of interest rates could spark a possible reversal in China’s slow bank lending, which has developed due to lower borrower demands.

This sounds to me like all the right ingredients for economic growth stimulation. And it all comes at an integral time, especially with Europe’s wounded economy permeating others around it. The potential for economic failure within the euro-zone should also have US investors weary of an economic domino effect.

Hopefully Warren Buffett was right in his recent statement that the U.S. economy should be safe from a recession relapse “unless events in Europe develop in some way that spills over here big-time.” Right now though, things are heading in a positive direction for everyone. With China’s interest rate cuts strengthening its own economy, more capital will be available for potential allocation into European investments, thus contributing in some way to global monetary rebalance.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Author Bio

After more than a decade of poor returns, the print media has turned decidedly bearish on the stock market.  The front page of USA Today on May 7 for example, contained a center column with the gloomy headline, “Invest in stocks? FORGET ABOUT IT.”

The column’s opening left the reader under no illusion as to its downbeat view on equity investing.  It read, “On Main Street these days, investing in the stock market is about as popular as watching a scary movie on a 12-inch black-and-white TV.  Wall Street’s long-running story about how stocks are the best way to build wealth seems tired, dated, and less believable to many individual investors.”

USA Today is not alone in its skeptical views on the merits of equity investing, as similarly-themed pieces have featured across the entire spectrum of the print media, including the Financial Times.  Not to worry, say the bull market cheerleaders, who believe that such commentary is an important contrary indicator that could well spell better times for equity investors in the months and years ahead.

The bullish interpretation appears to stem from the infamous cover story, entitled, “The Death of Equities,” which featured in Business Week on August 13, 1979, and concluded with the lines, “Today, the old attitude of buying solid stocks as a cornerstone for one’s life savings and retirement has simply disappeared. Says a young U.S. executive: Have you been to an American stockholders’ meeting lately? They’re all old fogies. The stock market is just not where the action’s at.”

According to the uber-bulls, the article’s publication coincided with an important inflection point in the equity market’s fortunes.  They say that it marked the end of a prolonged period of poor stock market returns that began in the mid- to late-1960s, and the birth of an extended upward trend in the major market averages that persisted until the summer of 2000.

The perennial optimists are undoubtedly correct in their assertion that the negative opinions expressed in newspaper stories, both in the late-1970s and now, are remarkably similar.  However, the ultimate conclusion that this is an unequivocal bullish development is premised on myth and wishful thinking rather than sound analysis; the bullish interpretation is simply not supported by historical fact.

Turn back the clock to August 13, 1979 and the S&P 500 closed at 107, a level it first reached more than a decade earlier in November 1968.  Adjusted for inflation, the market average’s performance was far more disturbing with the price index giving up all the capital gains generated since the summer of 1955 – a dismal run that pushed valuations to generational lows of just eight times trend earnings.

Despite the compelling valuation, equity investors were still not out of the woods, as the appointment of Paul Volcker to the helm of the Federal Reserve one week prior to the article’s publication, was accompanied by a radical change in monetary policy that was designed to bring an end to the era’s runaway inflation.  The new direction for Fed policy was issued Saturday evening, October 6, 1979, when the discount rate was raised by a full percentage point to twelve per cent, and other special measures were implemented to rein in the money supply.

The Volcker Fed’s appropriately-named ‘Saturday Night Massacre’ triggered an immediate response from financial markets; the major stock market averages registered a six percentage point decline in the trading week that followed, while the yield offered on ten-year Treasuries jumped above ten per cent for the first time.  Further weakness was to follow as the economy slid into recession, and stock prices continued their descent until the spring of 1980.

The ‘Saturday Night Massacre’ was only the beginning of the six-foot, seven-inch Fed chairman’s anti-inflation crusade.  Following a brief lull during the 1980 downturn, Volcker began to tighten interest rates even more once that year’s presidential election was over.  Ten-year yields soared to more than fifteen per cent during the autumn of 1981, while stock prices entered a steep decline, as the economy suffered its deepest recession since the 1930s.

Almost three years after the publication of Business Week’s article and the stock market finally hit bottom on August 12, 1982.  In the intervening years, investors in the S&P 500 appeared to suffer only a relatively modest decline, as the index dropped from 107 to 102.  However, the elevated inflation rates at the time meant that the erosion of purchasing power was far more serious.  Indeed, the capital loss in real terms approached thirty per cent as the inflation-adjusted price index re-visited levels first seen more than eight decades earlier during the spring of 1901.

Uber bullish investment strategists are salivating over the prospects of solid multi-year stock market gains following the publication of several articles in the print media that are eerily similar to Business Week’s “Death of Equities” in 1979.  However, the positive spin demonstrates not only a complete lack of knowledge of the period in question, but also fails to mention that the price multiple on trend earnings is more than ten points higher today.

Should investors act on the advice of such perennial optimists?  FORGET ABOUT IT.

www.charliefell.com

Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.