Why are stock markets buoyant amidst Eurozone chaos?

9th December 2011

The distinction is important because if markets are relying on Eurozone policymakers to come up with a solution and they don't – which is possible – there may be a significant meltdown in equity markets. If there are other factors at work, equity markets may prove more stable.

Despite the gloom in Europe, there is some basic economic rationale behind higher equity markets. Recent economic data from the US has been promising: "November U.S unemployment unexpectedly dropped to 8.6 percent, U.S. auto sales in November were the strongest in more than two years, and preliminary data on holiday retail sales appears to be strong. According to Bloomberg News, Black Friday sales hit a record high this year, with consumers spending $11.4 billion." The US is, after all, still the largest economy in the world and the most consumptive. Its strength should be beneficial to the global economy.

There are also some technical factors at work that tend to boost equity markets in November and December: "Stock funds try to improve year-end results by pushing stock prices higher. Other reasons include interest payments in December, because year-end bond coupon payments flow partially into the stock market. The holiday effect (christmas, year-end) also plays a role. Moods are generally positive and many investors use the time-off to make investment decisions."

"Historically, December is the best month for the S&P 500, with an average gain of 1.65%. The second best-performing month, on average, is November. December is also the least historically volatile month, with a standard deviation of returns of 3.17%. The next least-volatile month is March."

This doesn't necessarily mean that there aren't risks. In this piece on Business Insider shows that there is perhaps too much optimism in markets: "Clients with which we meet tend to agree, that a year end rally is "baked into the cake" as one put it, for many of the factors we have outlined in previous notes. That acceptance makes us a bit nervous but if the headlines cooperate, we see no reason this cannot occur." Yet headlines have not tended to prove co-operative in recent months.

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