Stocks stagger as end of party nears

Fears that the easy-money era is coming to an end has started to weigh on stock markets.

Stocks have stumbled badly in recent days. A sharp sell-off late last week left the Dow Jones index in the red for the year. The S&P 500 posted its worst weekly fall in two years, a slide of 2.6%. The pan-European FTSE Eurofirst 300 index slid by almost 3% last week to a four-month low.

Markets have been able to shrug off a wide array of problems so far this year, says Randall Forsyth in Barron's. These include China's banking system; the Isis insurgency in Iraq; the Ukraine crisis and sanctions on Russia; and Gaza. "Excluded from this list is the latest default by Argentina since, like the Chicago Cubs, anybody can have a bad century."

But all these issues now appear to have begun weighing on markets, while in Europe investors were also rattled by the deepening hole at Portugal's Banco Espirito Santo, which the state bailed out early this week.

However, the main concern is that the end of the easy-money era is coming. Strong data this week suggested that interest rates could rise sooner than most people had imagined.

Markets have been "gorging" on cheap or free liquidity from printed cash or low interest rates for years now, says Allister Heath in The Daily Telegraph. But the party could be over soon. The US Federal Reserve is due to finish its money printing, or quantitative easing, programme, in October.

The markets had been pencilling a possible first rate hike in late 2015. But it's looking as though "we are closer tolift-off than the market assumed we were", says Fed member Richard Fisher. So uncertainty has crept into US monetary policy, which tends to dictate the tone for world markets.

American growth has rebounded

703-DJIA

"When wage growth heats up," says The Wall Street Journal, "the economy will have absorbed enough jobs to push inflation higher." This could be starting to happen. Average hourly earnings are only rising at 2% a year, according to last week's job figures.

But other gauges tell a different story. For instance, the Employment Cost index (ECI), which monitors wage and benefit costs for employers, jumped by 0.75% in the second quarter, the fastest rise since early 2008.

A recent analysis by JP Morgan suggests that the ECI has been the best indicator among wage and labour-cost measures when it comes to predicting where inflation is headed.

Coping with higher rates

But this time round the amount of monetary loosening and money printing has been unprecedented, while debt loads have never been higher: in the developed world, total debt is worth 275% of GDP. So higher interest rates will be more of a burden than previously.

Given all this, the Fed and other central banks will be loath to tighten too soon in case the economy can't cope. But the danger of waiting is that inflation could take off, necessitating potentially larger and faster hikes later and squeezing the economy harder than they needed to in the first place.

Of course, they could time it beautifully, tempering inflation and allowing growth to continue. But since central banks "failed to anticipate the debt crisis of 2006-2008", says Buttonwood in The Economist, "this is an attitude of the purest optimism".

Recommended

Stockmarkets shrug off turbulence
Stockmarkets

Stockmarkets shrug off turbulence

Stockmarkets have hit their first bout of turbulence of the year, but most are clinging onto January’s gains.
4 Feb 2021
Three ways to avoid a big Deliveroo-style flop
UK stockmarkets

Three ways to avoid a big Deliveroo-style flop

Deliveroo's IPO – the most exciting new stockmarket flotation for a generation – turned out to be a big flop. It needn’t have been, says Matthew Lynn.
11 Apr 2021
What China’s new red dawn means for Hong Kong
Chinese economy

What China’s new red dawn means for Hong Kong

China has once again moved to tighten its control over the former British territory and global financial centre. What will remain of the old Hong Kong…
10 Apr 2021
The charts that matter: gold up; dollar down
Global Economy

The charts that matter: gold up; dollar down

Gold rallied a little this week, while the US dollar drifted. Here’s how the charts that matter most to the global economy reacted.
10 Apr 2021

Most Popular

Central banks are rushing to build digital currencies. What are they, and what do they mean for you?
Bitcoin

Central banks are rushing to build digital currencies. What are they, and what do they mean for you?

As bitcoin continues to soar in value, many of the world’s central banks are looking to emulate it by issuing their own digital currencies. But centra…
8 Apr 2021
Nuclear power might never be popular – but now looks a good time to invest
Commodities

Nuclear power might never be popular – but now looks a good time to invest

Nuclear power gets a very bad press, but it is the ultimate renewable energy source. Interest in it is perking up again, says John Stepek. Which means…
9 Apr 2021
House prices: from boom to even bigger boom
House prices

House prices: from boom to even bigger boom

UK house prices have risen to new to record highs, says Nicole Garcia Merida. Demand continues to outpace supply, but continued low interest rates, th…
9 Apr 2021