Wall Street’s nine-year bull run may be on its last legs - raising fears of a widening bear market mirroring the length of the historic upswing as 20 percent-plus reversals grip large swathes of the global equities universe.
If a prolonged equity funk feeds back into the real economy via cowed business sentiment, reduced corporate spending and investment, the threat of a deeper global economic downturn and even recession mounts.
So far, so cyclical. For many, it’s long overdue.
The big question, and arguably the bigger worry, is just how much monetary and fiscal policymakers can cushion the fall.
Investors are starting to realize they may be at a turning point. A Morgan Stanley client survey of over 100 portfolio managers and chief investment officers shows 80 percent of them cautious or bearish, and only 20 percent optimistic or bullish.
The survey notes a “psyche shift” that wasn’t there in February, when a sudden burst of market volatility triggered a 12 pct slide on Wall Street. Then, there was “strong” buying of the dips as clients added heavily to their long positions. Now, they are far more inclined to sell into any rally.
“It’s becoming clear after investor feedback and market action that sentiment has taken a significantly bearish turn,” Morgan Stanley notes.
BlackRock notes that stocks and earnings growth are already decoupling globally, and that’s before the widely anticipated slowdown in earnings growth next year.
Analysts at Goldman Sachs point out that last week marked the first time since 1990 that the S&P 500 fell 13 days in a three-week period. The magnitude of the losses may not be on a par with the dotcom collapse or 2008, but the frequency is “dramatic” and should ring alarm bells.
The S&P 500 has lost nearly 10 per cent in October, its worst month since February 2009. It did plummet 12 percent in just two weeks between Jan. 26 and Feb. 9 this year, but the scope for recovery now is much narrower.
POLICY PARALYSIS?
The Fed’s ability to control longer-term borrowing costs is diminished. All else equal, a deluge of new Treasury debt sales to fund the government’s $1.5-trillion of tax cuts and increased military spending puts a natural floor under yields.
The U.S. budget deficit for fiscal year 2018 was $779-billion, the widest since 2012, and will approach $1-trillion next year. This is a “serious issue” given that the deficit is ballooning at a time of pretty decent growth, the Bipartisan Policy Center warns.
Trump’s fiscal stimulus may have given the economy a shot in the arm this year, but that will soon wear off. Current U.S. growth of 3.5 percent will probably slow towards 2 percent by the end of next year, and the odds on a recession by 2020 are shortening.
Any prospect of additional fiscal stimulus will be severely curtailed if the Democrats win control of the House of Representatives in next month’s mid-term elections. Gridlock in Washington will see to that.
Just as U.S. government borrowing is set to reach $1.34-trillion in 2018 - more than double the previous year - the Fed is shrinking its balance sheet. Quantitative easing has given way to quantitative tightening, and interest rates are rising.
The scope for adequate growth-boosting policy responses beyond U.S. shores is also narrowing. That won’t guarantee an equity bear market, but it does make buy-on-dip rallies more difficult to come by.
China’s economy expanded at an annual 6.7 percent in the third quarter. Growth has come in lower than that only once in the last quarter of a century, and that was the 6.4 per cent chalked up in the Great Financial Crisis in the first quarter of 2009.
Beijing has more than $3-trillion of foreign-currency reserves it can use to kick-start the economy, it’s easing banks’ credit restrictions, and has allowed the yuan to fall to a 10-year low against the dollar. It is down some 10 per cent since March.
But trade tensions are beginning to bite, and Europe is feeling the pain too: euro zone growth slowed to a 0.2-per-cent quarterly rate in the third quarter, half the expected pace and the lowest in over four years.
Euro zone growth is rolling over at just the wrong time, as the European Central Bank brings its 2.6 trillion-euro QE program to an end and lays the groundwork for higher interest rates next year. Or will Mario Draghi and co blink?
Some emerging-market economies are in a deep slowdown or even recession, and many emerging-market stock indices are already in bear market territory. But their central banks are being forced to raise interest rates to prop up their currencies.
Take all that together, and the profit and earnings growth outlook for Wall Street and beyond is challenging. Analysts at Barclays estimate that U.S. earnings growth will fall to less than 10 percent next year from over 20 per cent this year, and warn that an “all-out” U.S.-China trade war would reduce that by a further 3 per cent.