Ten years after the crash how strong is the bull?

To the day, it is ten years since the bottom of the bear market and what an extraordinary bull market it has been. Since Wall Street, by and large, sets the tone for the rest of the world, it’s market performance is as good a guideline as any.

Between the 677 point nadir on 9 March 2009 to the early October 2018 all-time record of 2940, the S&P 500 index soared by a staggering 334 per cent. The annual compound rate of over 13 per cent was not achieved without blips as there were five “corrections” ranging between 7 per cent and 21 per cent. The most recent decline between October and December 2018, was the worst. But the subsequent swift rally has lifted the S&P 500 to within 5 per cent of last year’s peak. The market, however, is dangerously volatile. (see chart comment below).

Economists at The Bank for International Settlements (BIS) admit that the markets have become rather confusing and similar to equity pundits are fearful of predicting the top. Many Jeremiah forecasts have landed in the dustbins of history. The BIS officials know very well that if President Trump achieves a reasonable trade deal and Theresa May’s Brexit deal scrapes through, mere relief could push the S&P 500 through 3,000 with other markets following suit. The big question is how long any renewed boom would last.

After deep pessimism early 2009, the S & P 500 index rallied sharply. The first phase of the bull market ended in the spring of 2011 and after a scary decline, the second phase began and peaked in 2015. During the following correction, Fed chair Janet Yellen pumped more money into the system and the third phase ended at an all-time record late last year. Pundits fretted that the subsequent 21 per cent fall was the onset of a bear market. The recovery since then has been strong, but the question is whether it is a bear market rally. Share values are expensive and the US economy is slowing down.

Recall the bull market euphoria of 2007 and then deep pessimism in the first quarter of 2009. Even Warren Buffett was worried about the outlook early 2009, leading to an unkind jibe, “If the Bull in chief is at last bearish, then it’s time to buy.”

The bear market climaxed when funds and other investors dumped shares because they had been caught in the Madoff Ponzi scheme. It was a wild volatile, time. Industrial and commercial shares had already crashed to lows in October and November 2008 after Lehman Brothers fell. They had rallied in December, but the Madoff scandal dragged the market down to its final lows in March 2009.

Monetary ease and zero or miniscule interest rates spurred the market

During the subsequent ten years, central bank quantitative easing (QE) caused not only soaring stock markets but at various times, booming property, commodity and art prices. Central banks slashed interest rates and purchased bonds from financial institutions causing bond yields, i.e. long-term interest rates to tumble. Flush with cash, institutions bought financial assets extending the wealth of individuals who held them. The first QE moves were aimed at countering liquidity and financial crises, but as the years passed, the US Federal Reserve, European Central Bank (ECB), Bank of Japan and Bank of England flooded the markets with money when they fretted that a market correction would turn into a crash. The inevitable result was yet another upturn.

It took some time before financial booms boosted economies

Critics are complaining that QE only lifted growth belatedly. The reason is that European nations, in particular, pursued a policy of lower state spending and high taxation austerity. Those who owned properties, bonds and shares benefited. Others were left behind. Unsurprisingly, income inequality has widened causing discontent and envy and inevitably the rise of far right and far left political parties and factions.

And here’s a depressing statistic:  the gross domestic products of Eurozone nations, Germany, France, Italy, Spain, Portugal and the UK are still at lower levels than pre-crisis 2008. Japan is in the same boat. In only recent years, European economies have improved from worst levels with direct investment in job-creating factories, plants and equipment.

Extensive debt could be global markets’ achilles heel

Nations such as the US, China, Singapore, which steered clear of austerity, have GDPs well in excess of pre-crisis levels.  Both the BIS and OECD predict a slowdown. But their biggest fear is the surge in State, corporate and household debt. Year after year borrowing has been growing. The BIS estimates that in the third quarter of 2018, total core debt of the non-financial sector in the US totalled $50.1 trillion or 248 per cent of GDP; Euro area, $34.6 trillion or 260 per cent of GDP and emerging market economies, $53.4 trillion or 177 per cent of GDP. The OECD warns that in an economic downturn, highly leveraged companies i.e. overborrowed businesses, could be under acute pressure and potentially fail. This in itself is a warning to stock market investors. Tread carefully and in particular study balance sheets closely.

© Copyright Neil Behrmann This Leader editorial was first published in The Business Times, Singapore
Neil Behrmann
is London correspondent of The Business Times. Jack of Diamonds his thriller on global diamond mining and smuggling, has recently been published. It is the sequel to the thriller, Trader Jack, The Story of Jack Miner. See reviews of both books on: https://www.amazon.co.uk/Neil-Behrmann/e/B005HA9E3M

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