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Stocks hit new highs: Is the exuberance rational this time?
business briefing
Michael Babad
Michael Babad

This article was published more than 10 years ago. Some information may no longer be current.

Nasdaq at 4,000
Record stock prices are raising inevitable questions about whether we're due for a fall, and whether this time the exuberance is rational or, as then-Fed chairman Alan Greenspan so famously put it, irrational.

This comes amid the record-breaking moves of the Dow Jones industrial average and S&P 500 again today, and the second consecutive close above 4,000 for the Nasdaq composite index. The index hasn't closed at that level in 13 years.

Today's gains were muted – the Dow closed up just shy of 0.2 per cent, the S&P 500 almost 0.3 per cent, and Nasdaq near 0.7 per cent per cent – but, hey, they're still continuing their winning ways.

Some observers believe it's different this time around: Companies fuelling the rise in the Nasdaq, for example, boast different metrics and hold far more promise than during the heady days of 1999.

But others feel stock prices are outrunning both earnings and economic fundamentals, driven by easy money policies among the world's central banks that are pushing investors into riskier assets in search of better returns.

Analyst Brenda Kelly of IG in London believes it's not 1999 all over again. The market is "definitely ever so slightly overheated," but nothing like the dot-com days, though there could well be a small correction.

And so much of this has to do with the outlook for the U.S. economy, notably the labour market, which is driving the U.S. central bank and its plans to "taper," or pull back on, its massive bond-buying program known as quantitative easing, or QE.

Which means next week's employment data in the U.S. will be key to the markets as it will be the last measure of the year on unemployment.

"I think the key question revolves around whether or not valuations reflect economic conditions, not only in the U.S., but also globally," said senior analyst Michael Hewson of CMC Markets in London.

"If stimulus starts to get withdrawn, can current stock market valuations be sustained?" he said today.

"If the answer is 'no,' then you have to ask how sustainable the current rally is. In my opinion U.S. markets are priced to perfection so if growth disappoints, which seems like, then you have to say that markets seem mispriced. We do need a correction but until I see some evidence of a reversal I'm not going to stand in the way of the current up move given that this year the bears have been steamrollered away into oblivion."

Senior economist Robert Kavcic of BMO Nesbitt Burns believes the comparison with 1999 isn't legit, though the surge in Twitter Inc.'s trading debut raised some eyebrows.

"According to PwC, there were 160 U.S. IPOs through the first three quarters of 2013, up 48 per cent from the same period last year – child's play compared to the roughly 500 that were trotted out in 1999," he said.

"Another concern has been the recent spike in NYSE margin debt, up 27 per cent year-over-year in September," he added in a recent report.

"While worthy of attention, 1999 it is not – margin debt surged almost 80 per cent year-over-year at the tail end of the dot-com bubble. Finally, there are valuations. Despite the fact that stock prices have clearly begun to outpace earnings growth, a comparison to 1999 is not even worth making."

Merkel strikes deal
Amid the global debate over minimum and fair wages comes something of a milestone in Germany today.

Chancellor Angela Merkel reportedly struck a deal with the Social Democratic Party to form a coalition government that would, among other things, strike a minimum wage.

While the tentative agreement still has to be approved by the parties, the proposal would peg the minimum, to be phased in starting in 2015, at €8.50 ($12.23 Canadian) an hour, among the top in Europe.

This comes amid growing controversy surrounding fair pay from the United States to Bangladesh and Canada, where the country is grappling with income inequality.

In Ontario, a government advisory panel will soon report on the issue.

Most recently, the Canadian Centre for Policy Alternatives recommended a "core benchmark" to set Ontario's minimum wage. The group wants to see the floor set at 60 per cent of the average industrial wage, or about $14.50 now.

After that, it argued in a report, pay would be adjusted for inflation, a plan that "balances the needs of vulnerable workers with the dual goal of shared prosperity and ensuring that every job in Ontario is a good job.

The Ontario Chamber of Commerce has also proposed linking the minimum wage to inflation.

Some business groups argue that higher minimum wages kill jobs, thus hurting the very people they're meant to protect.

In a 2011 report, for example, the Canadian Federation of Independent Business, which represents small- and medium-sized concerns across the country, estimated that a 10-per-cent hike in the floor costs between 92,300 and 321,300 jobs in all provinces in the form of hiring freezes, reduced labour market growth or cuts during a slump.

"Small business owners aim to offer competitive wages that will help them attract and retain good staff," the group said.

"However, experience has shown that large jumps in the minimum wage tend to hurt the very people they are supposed to help: low-skilled and low-income Canadians. An increase to minimum wage forces small businesses to look for ways to absorb the cost through measures such as reduced hours, reduced training, or even job cuts."

Bitcoin surges
Bitcoin cracked the $1,000 mark today, reportedly driven by speculators amid widespread publicity and rising credibility for the virtual currency.

But amid these sharp gains – it's gaining credence in China and among some powerful players in the U.S., for example - some observers warn that there's no telling where it all ends.

As in, a poker game might work just as well.

"If you can guess where the crowd is going to go tomorrow, you can have some fun gambling here," Professor Jim Angel of Georgetown University told The Financial Times.

The professor's comments came as the value of one Bitcoin topped $1,000 on the Mt. Gox online exchange, hitting a record $1,073, though they later slipped back.

"That it is increasingly correlating with global equity markets and as such suggests that we have a similar crowd operating in both markets, one being deeply liquid and the one built to have a deeply restricted supply," said Sébastien Galy, part of the foreign exchange team at Société Générale.

As chief market strategist Nicholas Colas of ConvergEx Group told Bloomberg News, the value of this money is arbitrary, though "$1,000 for a Bitcoin would draw attention and certainly gives people positive on the currency another reason to laugh at the naysayers."

All of which gets one wondering (jokingly, of course) whether Iceland, the poster child of meltdowns, might want to adopt it as its currency. Remember, some factions in Iceland wanted to ditch the krona for the Canadian dollar, though the country's central bank threw cold water on that one.

IMF projects pick-up
Canada's economy is expected to gather steam next year, buoyed by demand from the U.S., though elevated household debt levels and high valuations in the housing market are still cause for concern, the International Monetary Fund said today.

The IMF pegs Canadian growth at 2.25 per cent next year – with output accelerating in the second half of 2014 – after estimated growth of 1.6 per cent this year, The Globe and Mail's Tavia Grant reports.

Growth this year has been only modest, the IMF said as exports and business investment "disappointed." Activity next year will be spurred by stronger external demand, although the fund highlighted debt and housing as chief risks. Canada's debt-to-income ratio reached a new record in the middle of this year.

"Elevated levels of household debt and high valuations in a number of housing markets remain a potential vulnerability," it cautioned.

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