Everything You Want To Know About The Markets

Everything you ever wanted to know about the markets in 98 pages of graphs by Mary Ann Bartels of Merrill Lynch. Her monthly chart book is out. Four major macro themes drive her view:

1) International reserve assets are potentially a powerful source of global equity demand. The desire of countries such as China, Japan, Russia, and Norway to enhance investment returns for government funds and/or reserve accounts is only the beginning of a long-term structural trend that could increase significantly the demand for global equities, in our view. These 4 countries control nearly half of the world’s $5.25 trillion in international reserve assets.

2) Secular trend of ’42-’68 all over again? The new secular bull market in stocks from the 2002 lows is taking place in the context of a commodity bull
market and a maturing multi-decade downtrend in yields. It would seem, therefore, that this new uptrend has the potential to be an “inflationary,” making it more similar to the 1940s-1960s bull market than to the 1980s-1990s bull market, which was a “disinflationary.” Similar to the Marshall Plan in Europe, the rebuilding of Japan, and the development of the Interstate Highway system in the US after WW II and into the 1960s, the infrastructure development in emerging economies such as China and India will help drive the current secular bull market, in our view.

3) The global secular decline in long rates appears completed. The break above long-term downtrend lines for global yields marks just the beginning of a shift to a secular uptrend in global long rates that could potentially represent a 20-year cycle. Higher rates (lower bond prices)would provide support for our other macro themes and reflect a shift of funds out of long-term debt into riskier
assets to enhance investment returns for government funds and/or reserve accounts (Macro Theme #1) or into infrastructure development in emerging economies (#2). In our view, both would help fuel a secular bull market for global equities.

4) Individual investors = shift back into equities. Individual investors have largely sat out the advance from the 2002 lows. Stocks and mutual funds as a
percentage of total household financial assets reached a record high of 37.2% in late 1999 and fell to 22.7% during the 2000-2002 bear market. Currently near 25%, this indicator suggests that individual investors should be a substantial source of liquidity for the equity markets. In our view, stock and mutual fund
investments as a percentage of total household financial assets could meet or exceed the late 1999 highs as the secular uptrend from 2002 continues.