Be Careful Out ThereBe Careful Out There
In 2003, the equity markets finally broke a three-year losing streak and the corporate bond market continued a strong rally that began in late 2002. Many pundits argued that the stock market recovery heralded a new bull market; others pointed out that the underpinnings of the rally were weak. In the credit markets, a lot of noise was made about a bond bubble as the Federal Reserve kept U.S. interest
January 1, 2004
Michael E. Lewitt, president, Harch Capital Management, Inc., Boca Raton, Fla.
In 2003, the equity markets finally broke a three-year losing streak and the corporate bond market continued a strong rally that began in late 2002. Many pundits argued that the stock market recovery heralded a new bull market; others pointed out that the underpinnings of the rally were weak. In the credit markets, a lot of noise was made about a “bond bubble” as the Federal Reserve kept U.S. interest rates at record lows, while consumers and businesses continued to borrow at unprecedented levels.
As 2003 progressed, two things became increasingly clear:
Investors were prepared to ignore evidence of long-term economic problems and put money to work in stocks and bonds. Significant financial imbalances simply were not being taken into account, including a burgeoning U.S. current account deficit, a sharp deterioration in U.S. government finances, an overvalued dollar, huge corporate pension shortfalls, continued structural weakness in the European and Japanese economies, increasing protectionist noises, and geopolitical risk in the Middle East and the Korean peninsula.
Investors also jumped for joy (and dug into their pockets) at every hint of an economic revival — despite the fact that evidence of real recover was inadequate until the fourth quarter of 2003 (by which time the markets already had rallied impressively). By December, there were promising signs that the economy was on the road to recovery (just in time for the 2004 presidential election). Living up to the dictum that “bull markets climb a wall of worry,” market participants chose to believe that Herculean efforts at monetary and fiscal stimulus finally would succeed in reviving the U.S. economy from three years of doldrums. All of the major equity indices rallied strongly throughout the year. But one worrisome indicator was that the most speculative Nasdaq stocks rallied the most. The stock of companies like Amazon.com, Inc., eBay Inc. and Yahoo! Inc. were approaching the kind of stratospheric multiples last seen before the Internet stock bubble burst in 2000.
These astronomical share prices called to mind the words of a participant in the 18th century South Sea Bubb...
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