To supplement our release of the "Top Market Myths of 2007" last week, it's only appropriate we give a nod to a few of 2007's most meaningful market storylines. Some important stories got less than their due in the press, but still managed to influence the economy in ways many couldn't quite fathom, while others never seemed to leave the front page.
In no particular order, here's a look back at some of the top market storylines of 2007. We wish everyone a happy and prosperous New Year. See you in 2008!
Global M&A and Share Buyback Activity Hits Record Highs
Shrinking stock supply was a powerful and underappreciated force supporting stock prices in 2007. While trouble in credit markets clipped the torrid pace set earlier in the year, it wasn't enough to keep 2007 from reaching record territory for merger and share buyback activity.
Global Productivity Growth Surges
Productivity growth is one of the unsung heroes of the current bull market. While many called for a slowdown, 2007 proved to be a trend continuation as companies throughout the world became more efficient. All the while, unemployment stayed very low, particularly in the US.
Political Changes Throughout the Globe
From a new US Congress to changes in leadership in the UK, France, Japan, and Australia (to name a few), it was a year of political change. Well, at least in name. For the most part, though the names shifted, the policies didn't. Protectionist sentiment remained all talk, and few initiatives big enough to affect global markets were originated by major government entities.
In the US, Bush wasn't the only lame quacker this year. It disappointed many that the new Congress was a do-nothing bunch. However, an underappreciated—and powerful—fact for markets is…well, the fact they did nothing at all! A do-nothing Congress is a positive for markets—it means legislative risks are low, and that's one less thing for investors to worry about.
China Shows Its Capitalist Side
From booming economic growth, continued deregulation, and high-flying stock markets to questionable consumer safety policies, China's unique blend of communism and capitalism made the headlines all year. For the most part, news emerging from China was probably overblown. While unquestionably a big economic player in terms of output and trade, China's stock market is still relatively tiny compared to most other developed nations. Nevertheless, China made an indelible mark on markets for the year and was a major component of emerging markets' outperformance.
Corporate Earnings Waver
In early 2007, corporate profits beat expectations handily. Those growth trends slowed through the latter half of the year, as Financials took big one-time asset write-downs. But, excepting Financials' woes, earnings showed strength.
The Return of Volatility
As folks fretted subprime mortgages and a credit crunch, markets bucked (at times violently). It was by far the most volatile year of the current bull market. But we should remember volatility in itself means little—big moves can be up just as often as down. Only the end result matters, and this year stocks finished up again.
Credit Crunch Shows Capital Markets Are Demonstrably Stronger Than Ever
2007's credit crunch and housing woes were undoubtedly among the biggest stories of the year, and very real problems. But we think these were also among the most misunderstood. Insofar as 2007 was concerned, problems in these areas didn't leak into other parts of the economy—a major reason stocks kept their heads above water this year.
But perhaps just as important is a widely unappreciated fact: Capital markets' demonstrated great resilience during the credit crunch. Whether it was through special auctions from central banks, cash infusions from foreign investors, or opportunity-seekers like Berkshire Hathaway establishing their own municipal reinsurance companies, 2007 was a year capital markets proved their mettle. Unquestionably, just ten years ago more than a few Financials would be bankrupt because they lacked access to global liquidity and resources firms have today. This was an unprecedented display of strength and stability.
The Glass Remains Half Empty
It might seem strange, but one of the most important stock investing stories of the year was the persistence of dour sentiment. Comparisons to the Great Depression, calls for Armageddon, and prognostications for a new bear market were routine headlines in 2007. Why is that important? Because bear markets don't announce themselves and are rarely—if ever—predicted by the masses. Almost always, a bull market requires widespread optimism before stocks can take a big fall. Down-trodden stocks were a priced-in expectation all year.
Instead, 2007 was a year folks decided to see the glass half empty, despite a bevy of strong economic data—even in lieu of the credit crunch! Instead of rationalizing bullishness, folks rationalized bearishness. That is exceedingly bullish, and a big reason stocks had another positive year.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.