Normally bull markets are full of people who are optimistic. They radiate enthusiasm for economies and shares. They hunt down markets or individual stocks that look cheap compared to the rest and recommend them. They recommend simply buying the global or local market to join in a general uplift in shares they expect. Eventually you reach the point where most people are both bullish and fully invested. Thats when the buying dries up. If it coincides with central banks having to raise rates to control inflation, and governments wanting to slow the economy down, the cycle flips over from expansion and bear markets point the way to recession.
This long bull market, starting in the spring of 2009, has had many periods of doubt. Even as Nasdaq hits new highs and the S&P 500 main US index does well, worried investors count their remaining cash and ask if they should cut their risks. The news background remains relentlessly negative. Will Mr Trumps tariff plans tip us into a global trade war? Will Chinas debts prove too much for her economy? Will the Italian challenge to the Euro scheme disrupt European markets? Is this the end of the cycle? Will the Fed raise rates too much, aborting the recovery? These are some of the topical fears, variants of fears often expressed in recent years. More people seem to ask investment professionals if they have missed the bull market than ask what to do with their heavily invested positions, as there is a lot of uninvested cash around.
Part of the current fear is based on the ever-newsworthy presence of President Trump. His bullish pursuit of tax cuts, higher spending and greater US economic success has provided some of the media input behind the good performance of the US indices over the last year and half. His challenging views on tariffs and trade, on the nature of the EU, on the need for NATO to reform and his wish to engage anew with North Korea and Russia have provided plenty of background for bearish commentaries. Part of the current uncertainty is based on the election of other populist governments, particularly in Europe, with agendas that oppose the disciplines of the Eurozone, question global free trade and the free movement of people in ways which many market commentators and investment professionals find concerning.
The task we have as investors is to concentrate on the underlying performance of the economies and companies, and to ask what impact all this media noise might have. In our view, this may not be the end of the cycle. Indeed, the threats to world trade serve to slow output growth and to delay tougher monetary action by the authorities. The Chinese are trying to carefully balance the need to rein in shadow banking excesses with the even more important need to hit their 6.7-6.9% growth targets, and to keep real incomes advancing. In all probability, the euro area will want to discipline the new Italian government but will presumably be aware of the dangers to the banking system and currency if it overdid its reaction to an expansionary Italian budget. The US authorities are raising interest rates in the knowledge that the tax cuts and spending boost are lifting growth anyway.
Investors have taken to technology in a big way, boosting Nasdaq the most of the major stock markets. This reflects the reality of turnover and profit transferring to new businesses models. It also leaves some technology stocks looking expensive, needing to grow rapidly to justify the prices. Its the nearest we get to traditional bull market conduct. Meanwhile other sectors and markets worry their way down from time to time.
There has been some slowing of money growth this year, especially in China. There will most probably be more rate rises in the USA, but not to the levels regarded as normal before the banking crash of 2008-9. It looks to us as if modest growth remains the most likely outcome.
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