Macroscope
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It’s probably nothing to worry about.... but stocks aren’t responding to good news any longer

The global rally has come a long way since the 2008 crash thanks to a full tank of central bank stimulus, but the market exhausted its reserves long ago

PUBLISHED : Monday, 04 December, 2017, 10:51am
UPDATED : Tuesday, 05 December, 2017, 8:23am

It could be looked back on as one of the defining moments of the post-crash rally, the day the bull market finally ran out of steam. Last Friday’s reasonably robust US non-farm payroll numbers should have been met with a confident thumbs up, but instead equities seemed quite unimpressed. Stock markets had other more daunting matters on their minds.

Some were putting it down to deeper cracks appearing in Donald Trump’s troubled presidency, but the truth is the rally has been running on empty for quite a while leaving forward momentum at risk of stalling. The rally has come a long way since the dark days of the 2008 crash thanks to a full tank of central bank super-stimulus, but the trouble is the market exhausted its reserves long ago.

Who knows, maybe the Republicans sealing a deal on the much-vaunted US tax reforms may give markets one last hurrah, but in the main it is old news. Investors have been there, seen it and done it before. It is a case of buy the rumour, sell the fact and time for markets to move on to the next major spur.

Sadly, there is precious little good news for markets to thrive on. Hope always springs eternal for stock market optimists, but blind faith is being dashed by the prospect of tougher times ahead. It is not just the Trump presidency floundering for so long, but everything positive the markets have gambled on in terms of robust reflation, wide-ranging reforms and radical deregulation have largely come unstuck. The wheels have come off the wagons and markets need a new inspirational lift, which seems in short supply.

This has been one of the longest bull markets on record thanks to the quick-thinking response of global policymakers in 2008, but equities can’t keep walking on water forever. Investors must weigh up whether markets are fairly-valued or have overshot reality after years of overindulging on cheaply-leveraged, super-heated bravado.

Judging by current valuations, stock market euphoria is clearly stretched. With US equity price-earnings ratios running up to 17-year highs, the case for market consolidation looks more convincing by the day. The wake-up call seems long overdue.

The good news is we are not staring into the same abyss as 2008 when the threat of a global financial meltdown was high and the world economy seemed in mortal danger. If we are lucky, we should only be heading into a correctional retracement for stocks. We have enjoyed nearly nine years of plenty, which normally should be followed by a lean period as investors take stock of an uncertain future.

The global monetary largesse is being reined in, but hopefully at a reasonable pace. It should be a Goldilocks taper, not too quick and not too slow, but sufficient enough to keep global recovery prospects alive and kicking. But this still poses a mighty big puzzle for central banks to untangle without upsetting economic and financial stability. Understandably, markets are wary.

With growth prospects in the advanced economies looking so pedestrian, there is no excuse for stock markets to keep throwing caution to the wind. The US economy is hardly on fire with 2.3 per cent GDP growth, Canada and Europe are plodding along around the 2 per cent mark, while Japan and the UK are close to stalling, with growth expected to slip below 1 per cent next year. The drag on emerging markets and developing economies is quite clear.

As long as there are no major setbacks, global recovery should muddle on, but the outlook still remains susceptible to any confluence of unfortunate events. The list of potential exogenous shocks should not be underestimated. A Trump impeachment, a major credit event, a military run-in with North Korea, hard Brexit, or sub-par growth in China could all pose major threats to investor confidence over the future.

Any number of things can happen, but what investors need assurance over is whether they feel as upbeat about trading opportunities in 2018 as they did at the outset of 2017 when global stimulus was still in full flow. Based on current fundamentals right now, the answer is no.

The option to lock in year-end profits and lie low for a while seems tempting. For the short term, dumping risk and playing safe seems a worthwhile game-plan until the fog clears. 2018 will be full of challenges.

David Brown is chief executive of New View Economics

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