The bull market celebrates seven years this month, but economists say that increased volatility and also the decreasing effectiveness of monetary “bazookas” to rally risk assets suggest the bull is running out of steam.
Nonetheless, the S&P 500 has were able to rally because the post-financial crisis lows of March 2009, even while a European debt crisis, a monetary deadlock in Washington along with a crash in oil prices have all threatened to finish the bull market over the years.
Global stocks fell into a bear market last month, however the S&P 500 narrowly avoided doing exactly the same and has since rallied from the February lows. Which means the bull marketplace is now 84 months long, the third-longest ever and shutting in on becoming the 2nd longest, an archive currently held through the 86 months of gains seen between June 1949 to August 1956.
Much of the present rally has been helped along by accommodative monetary policy in the U.S. Fed and easing policies generally all over the world. But the punch that such policies once had appears to be waning.
“The near-perverse market reaction to recent bazooka-like easing steps, beginning with the financial institution of Japan and it is negative rates and so the ECB this week, shows that we’ve almost reached the end of the road for central banks supporting asset prices and/or undercutting currencies,” said Douglas Porter, chief economist at BMO Capital Markets.
Still, that doesn’t necessarily mean the end is appropriate around the corner.
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The record for the longest bull marketplace is held by the 113-month rally seen from October 1990 to March 2000, a bull that BMO Capital Markets’ senior economist Robert Kavcic says has numerous parallels with the current environment.
Kavcic points out that in 1997, when that bull market was where the current one is today, the Fed had just hiked rates of interest by 25 basis points – as it did at its December meeting last year. But a sudden downturn within the global economy, exacerbated by the shock of the Asian Economic crisis, forced the Fed to backtrack on its policy.
Kavcic asserted any similar shift in policy this season could extend the marketplace rally to rival the one from the 1990s.
“Global headwinds were also blowing through 1997, resulting in the Fed to lay off its tightening cycle with the latter stages of the season (it raised rates once in March ’97), before eventually cutting rates 75 basis points in 1998,” Kavcic wrote inside a note to clients.
Economists had earlier this year speculated whether the Fed would be forced to halt rate hikes or even cut again following a wave of promoting hit global financial markets in January and February, accompanied by a 40 percent crash in oil prices. Chairwoman Janet Yellen noted that “financial volatility” had become an issue for that Open Market Financial Committee during a meeting in January.
But with markets rebounding, economists again expect the Fed continues to hike rates this year. Holding off on rate hikes risks overheating the economy, because the U.S. labour market sits at a level the central bank considers full employment and inflation has started to get.
Kavcic also notes that the risks of halting hikes or even cutting, such as what happened in 1998, would risk throwing risk assets in to the type of bubble that stop the 1990’s bull.
“Many will argue that, by 1997, the bull market would have rolled over if the Federal Reserve didn’t back away from tightening,” he said. “That shift, along with solid domestic economic fundamentals within the U.S., arguably helped fuel the final run-up in valuations through early 2000, which ultimately ended badly as monetary policy had to aggressively get caught up. We might be at an equally important stage of the cycle today.”
The Fed’s next policy meeting will be held from March 15-16, and financial markets are currently pricing in an almost zero percent chance the central bank will hike rates. June’s meeting is viewed as probably the most likely to see a hike, though analysts is going to be watching now to determine whether this type of move is going to be telegraphed within the Fed’s wording.
Financial Post
jshmuel@nationalpost.com
