Restrained enthusiasm

Markets: Birthdays are a good time to look back. The first anniversary of the global stock market rally — the lows were hit on March 9, 2009 — certainly brings back memories. It’s easy to see why the MSCI World Index is 71 per cent higher now than then.

Then there was a steep recession, now there is GDP growth. Then it was realistic to worry about such horrors as rapid deflation, serial banking crises and a competitive protectionism. All of those menaces have now receded. And stock market investors can be cheered to see companies sufficiently in control of their short-term destiny for most of them to meet or beat analyst expectations of reported profits.

But this birthday celebration is no better than bittersweet. The stock market rally has spluttered somewhat. While the UK’s commodity-heavy FTSE 100 index is hitting new highs, most others have made almost no progress for five months. That stalling reflects both an unexpectedly tepid economic recovery and serious worries about whether there will be much to celebrate on future birthdays of the 2009 stock market trough.

Too many of the wounds of the financial crisis remain unhealed. Central banks are still extraordinarily generous and unemployment rates remains unacceptably high. The world remains too leveraged for its own good. And while the financial system is no longer in crisis, its newfound ebullience is itself a cause for worry.

The new talk of inflation is a sign of how far from health markets are. Stock markets are ultimately good hedges against rising prices, but investors feel queasy when economists at serious institutions such as the International Monetary Fund, Morgan Stanley and Societe Generale see high inflation as either the most likely or the least bad way to erode excessive leverage.

Historically, a great 12 months in the stock market has usually been followed by a mediocre period — an average 3 per cent decline since 1940 in the United States, according to Deutsche Bank. Stock markets are still well below their peak levels, but there may not be much to celebrate this time next year.