Many reasons are being handed up to quote hungry media about why we are going through a market sell off, but perhaps the most realistic explanation is the one being ignored – that the US market has run out of juice and is at the end of the long rally from the depths of the GFC in March, 2009, and needs a break.
US investors have grown tired, the rally is stale, sentiment jaundiced, the easy gains have gone and with the Fed about to start normalising monetary policy by lifting interest rates, the days of easy money are fading and its back to the usual day to day slog. And adjusting to normality is proving hard and part of that adjustment is a lowering of stockmarket values, starting on Wall Street.
Yes, the US economy is doing OK, yes US jobs growth has been very strong, when it finally started 18 months to 2 years ago, long after the GFC’s echoes had faded and as businesses and consumers finally started responding to the biggest sugar hit every seen – three multi trillion dollar rounds of quantitative easing, on top of record low interest rates of 0% to 0.25% from the end of 2008 (the depths of the GFC when global markets froze over for a month to six weeks). But that growth has slowed a a little thanks to the slowdown in oil and gas and the high value of the US dollar crimping export income and company sales and profits.
Just take a look at the key market indicator, the Standard & Poor’s 500 index. It has come a long way from the depths of the GFC. It closed at 1,893.21 this morning, down 3.5%. It was a big daily fall, but one that should not have come as that big a surprise. Few commentators or analysts have thought to mention where the index has come from in the past six years or so.
The S&P 500’s GFC intraday low was 666.79 on March 6, 2009, its all time high was 2,134.72 on May 20 this year. That was a rise of more than 210%. The rise from the March, 2009 low to this morning’s close was a smaller, but a still impressive 182%. That has seen trillions of dollars in value added to the S&P 500 and the wider US market as a whole. Apple has boomed, Twitter, Facebook, have emerged, Amazon has grown, Netflix has popped up. The US tech driven growth story has been rekindled, helping drive markets higher. But now its gone stale.
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So since the peak in early May, the index, like the US market has been marking time, waiting to the US Federal Reserve to lift interest rates for the first time since 2006 (and to move the key US interest rate, the Fed Funds rate for the first time since December 2008, when it was set at its current level of 0% to 0.25%. To some commentators the weakness of mid August was like a taper tantrum, Wall Street responding to the looming rate rise, but readjusting values downwards to cope with a higher cost of money. But then last week it suddenly expanded into a more widespread sell off. The ennui turned into a real need to take profits and move to the sidelines.
The long rebound since March 2009 on Wall Street has supported global markets through thick and thin – such as the many and varied eurozone crises (did anyone notice how the euro has suddenly become a ‘safe haven’ and risen sharply since the markets sell off intensified last week? And this with the future of Greece, and its snap elections, still an unanswered question. Clearly some of the usual factors in the markets (Greece crisis equals a sell signal) no longer apply, or have been supplanted by something else. It is also significant that the German stockmarket has been sold off heavily as well, followed by France’s market. Both were among the best performed this year until recently. Both those markets seem to be following Wall Street lower because the rebound has run out of gas and investors no longer believe the many and varied reasons for pushing prices higher.
And then there’s China’s stockmarket which has been plunging off and on since mid-June, without the sort of impact we saw last Friday and overnight. The Chinese market is small beer in terms of global influence. It should not have had the spillover effect it has had except that it has become conflated with the slowing pace of the Chinese economy (as the flash report on manufacturing last week, with a six year low of 47.1 registered).
Fears about the health of China’s economy are a bigger influence on global stockmarkets than the performance of the Shanghai market. Watch for the full surveys of Chinese manufacturing to be released early next week – one from the government, one from Markit (which provided last Friday’s flash report). They will be big influences on sentiment towards China.
The Chinese market zoomed up 150% in its explosive rally to June 12 this year, and it is now busy retracing that surge. It was a boom based on politics not on economics as the Chinese Communist party tried to deflect attention from thew weakening economy, the security crackdown, the anti-corruption drive and the consolidation of power by President Xi, and the suppressing of rivals and dissident groups.
But if you had to look for just one factor it’s a combination of investor tiredness in listening to the same old growth story from the likes of Apple, the US media stocks, Amazon, stories about the tech boom off Wall Street (Uber, Air BnB and others) and the reasons for buying shares (future earnings or capital growth. For the moment these are no longer as convincing as they were earlier this year, a year ago or in 2010.
But a word of caution. At the moment this is a rather violent correction (violent because its August, the depths of the northern summer when trading volumes are thin and many investors on holidays). That will change from next week when trading desks staff up as the holidays end this weekend. if the correction continues, then it will be more serious and sustained.
So will this become become another GFC? For that you will need a shock – another Lehman Brothers. So ask yourself if there is any company out there that could cause a similar amount of damage to confidence and share prices as Lehman Brothers did on September 15, 2008. And remember, Lehmann Brothers was not a surprise, its struggles to survive had been going on for the best part of a year up to mid-September, 2008. What shocked markets into collapse was the failure of the Fed and US Treasury to rescue Lehman Brothers. Too big to fail is no longer a guiding principle among regulators, so remember that.
