Everything in the capital markets seems to be giving traders the green light. The benchmarks for each of the major asset classes (the Dow for equities, crude and gold for commodities and the Australian dollar for FX)
are all forging new highs and the third quarter earnings season is already off to a strong start. Yet, at what point can we say a rally is running on irrational exuberance? This is always easy to point out in hindsight. Accelerated reversals highlight markets that were clearly running beyond their fundamentals means. However, during all the excitement, it is very difficult to call. A long-term and objective view of the underlying facts though does provide a better grounding.
The traditional capital markets are indeed at highs for the year and there are plenty of funds that have yet to make their way back into the speculative arena. Also for an outlook, growth is rebounding and expected levels of return are recovering alongside liquidity. On the other hand, the projections for expansion almost always come with a disclaimer that it will be temperate. What’s more, the strong earnings’ reports from financial firms seem to drive confidence beyond comparisons to the strength of previous years and questions as to the losses associated with building losses related to credit.
The Dow has finally surmounted the psychological, 10,000 barrier and
crude oil has climbed above $75 per barrel; but were these technical levels the only thing holding back the seven-month bull trend? Certainly not.
The attraction of such media friendly numbers often draws markets higher to relieve tension. Yet, at this point, we have seen a 55 percent rally in the US equities market and a 134 percent advance in crude in this relatively short period.
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