The market’s internals are sending warning signs that a major shake-up in U.S. stocks is on the horizon.
1. China credit bubble – Is it a new economic model? Or the emperor’s new clothes? The economy is slowing and the central bank is attempting to rein in loose monetary policy by allowing bad loans to default.
2. IPO fever – Professional investors always exit at the top and it is no coincidence we have a record number of overvalued companies listing on stock markets.
3. Technology valuations – Companies that have only been around for a few years, barely make a profit, and are valued at billions of pounds? That’s almost evidence enough that people have taken leave of their senses.
4. Markets don’t rise forever – Studies show that the average length of a bull market was just over three years, with the longest bull market being about five years. From the lows in March 2009, we are now more than five years into a bull market.
5. End of easy money – For five years every time the markets have wobbled more money has been pumped into the economy, but that can’t go on for ever, the US and China are both tightening monetary policy at the same time.
6. Bitcoin – This is a symptom not a cause, the rise of a currency backed only by the trust of those who use it is evidence that central banks have destroyed faith in the monetary system through a concerted period of devaluation.
7. Gold – It was written off at the start of the year, but has risen by 8pc during the past three months as investors seek a safe haven, easily outpacing the FTSE 100, which has fallen by 1.3pc.
8. Credit markets – Years of low interest rates in advanced economies have encouraged global investors to seek higher yields in fast-growing developing countries. Credit investors are always much better at pricing risk than equity investors.
9. Earnings misses – There are signs the five year run of growing profits is coming to an end. We have had big earnings misses right across the sectors. Oil giant shell issued its first profit warning in 10 years, engine maker Rolls-Royce warned on profits, along with banking giant Citigroup, Pearson, the owner of the financial times, and online retailer Amazon.
10. Commodity market – Another sign of the end to easy money is falling commodity prices. Iron, oil and copper are all cheaper than they were at the start of the year
Investors have been piling into equities to get a better return as loose monetary policy has crushed interest rates around the world. But in the race for returns many have forgotten how to price risk; for these 10 reasons the coming nine months could prove to be a painful reminder.
Now that it’s spring, and the bears have awoken and are stirring in the markets, it’s a great time to check in on EWI’s somewhat unconventional view.
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