Macroscope | A stock market correction – long overdue – will tip the global economy into a perfect storm

Leading stock markets may finally be connecting with the real economy after a long period of in-denial euphoria. Even before US President Donald Trump signalled that trade wars may persist (only to be refuted by rumours of an imminent deal), there were signs that stock dumping might be imminent.

After a veritable frenzy of buying back their stocks, some big companies in the US and elsewhere are using their overvalued shares or “scrip” as a currency to buy other companies that have real assets and earnings while the going is still (just about) good. This is an ominous sign.

Buying back shares made sense for firms with interest rates at record lows. It makes debt capital cheap and results in higher earnings for remaining shareholders. But a recent wave high-profile mergers and acquisitions (M&As) – including LVMH buying Tiffany and the Manchester City football club deal – with some financed by share exchanges, has been seen by some analysts as signalling the end of the bull market.

I have been chided recently for being overly pessimistic about the risks of a crash and one Post reader noted “the sun goes down and the sun comes up”, meaning the economy moves in cycles and a downswing is not alarming. It is true that the sun follows the rain, summer follows winter and day follows night. But when financial “weather” patterns point to a perfect storm in the making, we should worry.

Other than the record bull market in stocks, it is hard to name one good thing on the global economic front. Trade and investment are declining, as are economic growth rates and business confidence.