Uncertainty prevails as markets are hooked on easy money

Uncertainty prevails as markets are hooked on easy money

LONDON - It is eight years since the Lehman Brothers bankruptcy caused a selling climax in the severe 2008 global bear market crash.

Since then Wall Street and other stock markets have soared, but once again uncertainty prevails while participants remain hooked on the central bank money-printing drug.

Such are the jitters at a time of slow US, European, Japanese and emerging market growth that there are knee-jerk reactions ahead and after central bank announcements.

What has become clear, however, is the pronouncements and actions of central bankers are having less and less impact on the markets.

Price movements have shrunk since former Federal Reserve chairman, Ben Bernanke, ruled the financial roost a few years ago.

Looking back at financial history, the S&P 500 index and other markets peaked in the autumn of 2007, fell, then rallied, and began declining again in the summer of 2008.

The selling accelerated in September as news of the Lehman Brothers crisis spread.

Stock markets bottomed in November 2008, rallied and then the Bernard Madoff scandal and a banking scare caused the final slump and end to the bear market in March 2009.

Since then, Mr Bernanke precipitated the central bank fashion of global quantitative easing, that is monetary easing.

Cuts in bank rates to almost zero in the US and UK and negative in Japan and Europe during a period of subnormal economic growth, caused sovereign and corporate bond prices to soar.

Alongside a remarkable bond bull market that has brought 10-year US Treasury bonds down from 5 per cent in mid-2008 to 1.35 per cent in recent weeks compared to the current 1.61 per cent, excess money poured into Wall Street and other soaring share markets.

Since its nadir the S&P 500 index has soared by 225 per cent and there have been similar gains in other developed stock markets, while emerging markets have been more erratic.

In the past 12 months, however, it has been increasingly difficult to make consistent gains in equity markets, although some individual shares, notably Facebook and Amazon, have continued to reach for the sky.

Helped by the technology stock boom, US stock indices have marginally beaten their 2015 highs.

In contrast, Japan, Germany, the UK, France, Australia and Singapore equity markets are still below last year's peaks.

The UK's FTSE 100, in particular, was hurt by a slide in oil and mining stocks. It slumped when voters surprised the markets and voted for Brexit, but since then the market has recovered.

Despite this revival, however, the "Footsie" is still 3 per cent below its 2015 top.

The question is where do the markets go from here? Technical analysts fear that markets could be forming "double tops" that are peaking, unless there is a marked break through to new heights.

From a valuation aspect, based on "Cape", the cyclically adjusted Shiller-Price earnings ratio, which is based on average inflation adjusted earnings from the previous 10 years, Singapore, followed by China, the UK and Hong Kong, offer far better value than Wall Street and Japan.

The cliche, however, is that when Wall Street sneezes, the world catches cold.

The main uncertainty is the US elections. The market is betting that Hillary Clinton will win, but Donald Trump could surprise and the result could bring in its wake a Wall Street setback.

Both candidates wish to raise infrastructure and defence spending, which would be accompanied by a spurt in borrowing and a rise in sovereign bond supplies.

In those circumstances, bond prices could well fall, bond yields could rise and a tumble in the bond market would likely hurt pricey equities.

Furthermore, 2017 will see French and German elections and the British Brexit negotiations battle at a time when public and private debt levels are at dangerously high levels.

Jeremy Siegel, a Wharton School perma bull, who has been one of the better forecasters in the long bull market, has become uncharacteristically cautious.

He is worried that company earnings growth has been slack, the US presidential, Senate and Congress elections are a concern and a Fed rate hike in December is a distinct possibility.

On the other hand, he doubts whether rates and bond yields will go much higher for several years so that the equity market would continue to attract surplus cash and bottom pickers in the event of a market setback.

This article was first published on September 26, 2016.
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