Is the US bull market over?

Dominic Frisby

Have you ever suspected that the financial world has lost touch with the real world?

Or marvelled at how the merest utterance of a central banker can add or destroy billions of pounds of value in a few seconds?

Then the events of the last few days will have had you wearily shaking your head.

Today we consider the recent, suddenly volatile market – and we wonder what happens next…

The increasingly ridiculous dependency of markets on central banks

As far as volatility is concerned, the last six or eight weeks have seen an almost unprecedented absence of it – until a few days ago.

Markets had gone nowhere. Big days, either up or down, had virtually disappeared. There were the odd bits of good news and a few bits of bad news, but markets seemed indifferent to almost all of it.

Bulls declared we were building a head of steam for the next leg up. Bears said that markets were rolling over and we should ready ourselves for a crash. Nothing actually happened.

Then Friday came along, and – almost out of nowhere – the US indices fell a (comparatively) whopping 2.5%. On Monday morning, Asian markets followed suit – Australia fell over 3%. The European indices were next. At one stage on Monday, the FTSE 100 was losing more than £1bn of value a minute.

Don’t jitters spread quickly? I guess some volatility was waiting to happen, one way or the other, but what sparked it all off?

As you might have already guessed, it’s down to central banks again. But as a measure of how ridiculous things have become, the sell-off wasn’t down to a specific statement by a US Federal Reserve official. No new policies were announced or implemented.

It was just down to a rumour about what a certain Fed official might say when she next made a statement.

The official in question is Lael Brainard. She’s a member of the Fed’s rate-setting committee, and she is known as a dove – in other words, she does not argue for interest rates to go up.

However, the rumour went about that in a scheduled speech on Monday she would turn hawkish. This is what triggered the selling. For goodness’ sake!

Everybody knows that interest rates are too low. They’ve been at record lows for eight years now. Of course, they will have to go up sooner or later. And in any case, Brainard herself was not putting them up. She doesn’t have the power to do that. She was simply rumoured to be making a hawkish statement.

And here’s the most ridiculous thing. When Brainard eventually made her speech on Monday evening, the main thrust of her argument was to warn against “moving too quickly on rate hikes”.

As a result, all the fear disappeared, and the US markets retraced almost the losses they had made on Friday.

We’re near the end, but this ain’t over yet

This is just yet another illustration of how ridiculously dependent markets have become on low interest rates and other forms of central bank stimulus. This cosy relationship is insidious and unhealthy, the very opposite of what capitalism, risk-taking and investment are supposed to be about.

Central bank intervention has created all sorts of distortions, not least the ever-rising wealth inequality gap. Central bankers have been all too willing to enjoy the power and status they have been given.

But markets now have them in a grip – if they raise rates, markets will sink and they will get the blame. As government officials whose every instinct is to not rock the boat (unlike entrepreneurs, whose instinct is the opposite), central banks won’t put up rates because they’re scared of the immediate consequences. The less tangible long-term consequences of the policies – the wealth gap, the debasement of money – be damned.

I think this point is worth reiterating. Almost every central banker of influence has got to where they are by not rocking the boat. That is how these institutions and career success within them work. Every single decision they make will, ultimately, be the one that rocks the boat the least.

As a result, interest rates will remain lower than they should be for much longer than they should. A whole new, widespread and universally-accepted narrative needs to enter the mainstream – that we must have higher rates, that higher rates are good and so on – before this changes.

Unhealthy although this relationship may be, there is nothing we as investors can do about it. The game is the game – we can’t change it – and that is what we must play.

The thing is – irony of ironies – yesterday, the day after the non-event of Brainard’s speech, markets tanked again. As I write this, at 2,127, the S&P 500 is just six points off its Friday low.

Could it be that markets are losing faith in the central banks to keep the show on the road?

I have to say that for all the volatility and the signs of a developing downtrend, I’m inclined to give bulls the benefit of the doubt for the time being, particularly in the US.

Governments and banks will continue to prop up markets one way or the other, and any serious sell-off will meet with some kind of stimulus. It won’t last forever, of course. But this, in my view at least, is a bull market that isn’t done yet. I think I’ve suggested before that we’re perhaps in the 70th or 75th minute of a 90-minute match.

I stand ready to change my mind. Goodness me, after the last few years we have had and the valuations we have in some cases reached, a large correction would make a lot of sense.

I’m just not sure we’re there yet.

PS One of my colleagues, Dr Mike Tubbs, doesn’t get drawn into these sorts of debates. Looking past bull markets and bear markets, he’s developed an investment strategy that cuts to the heart of what makes companies tick. It’s proven remarkably successful over the last eight years – latching on to companies on the cusp of a big price rise with an eerie regularity. If you’re looking for an interesting – and new – idea that could make a big difference to your portfolio, get your name down for a free ‘first look’ at his strategy.

Category: Market updates

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