Can the bulls keep going?

Headwinds have gathered in the stock markets, but it may not be enough to halt the rally.

Investors' "love affair" with shares could be heading for a "nasty break-up", says the Financial Times. America's S&P 500 has fallen by 4% from last month's record high. The pan-European and German markets are down by more than 10% taking them into official correction' territory. Is this the end of the post-2009 rally?

The lengthening list of geopolitical problems seems finally to have snapped markets out of their complacency. The worsening crisis in Ukraine, with Russia now slapping tit-for-tat sanctions on food and agricultural products from Europe, has caused the greatest worry.

"The evidence is building that Russian sanctions are starting to hit the [European] economy," reckons Jim Reid of Deutsche Bank. Russia is the European Union's third-largest trading partner behind the US and China, accounting for just under 10% of the region's trade.

But it's not just global turmoil. "When war trumpets sound, geopolitics beats finance," says James Mackintosh in the FT. However, "the rest of the time, worry about monetary policy". Thanks to strong recent data in the US, the first interest-rate rise in America may be closer than investors had expected and that's also got them rattled.

Yet the cumulative impact of all these concerns may not be enough to derail the rally, says Fidelity's Tom Stevenson in The Sunday Telegraph. History shows that rising but low interest rates "don't need to be a problem for stock markets". Investors should see higher rates as a sign of confidence in the recovery.

704-SP500

Meanwhile, as Capital Economics points out, more money printing looks likely in Europe and Japan as the European Central Bank tries to prevent deflation, and Japan's central bank tries to hit its 2% inflation target.

So, even if America picks up, global markets can expect more liquidity from other sources. And if the US takes an unexpected nosedive, there will be more money printing there too.

The pattern of the last 20 years has been that when things get tough, central banks do what they can to prop up markets. This artificial rally looks set to keep gorging on steroids, and if it falters, central bankers will up the dose.

Recommended

Inflation looks likely to take off this year – but there’s one key risk
Inflation

Inflation looks likely to take off this year – but there’s one key risk

With the world’s governments spending money hand over fist, inflation looks certain to take off at some point. But China could change all that. John S…
19 Jan 2021
Five online retail stocks to diversify your portfolio with
Share tips

Five online retail stocks to diversify your portfolio with

Professional investor Tancredi Cordero, founder and CEO of Kuros Associates, selects five of his favourite online retail stocks to buy now.
18 Jan 2021
Why investment forecasting is futile
Investment gurus

Why investment forecasting is futile

Every year events prove that forecasting is futile and 2020 was no exception, says Bill Miller, chairman and chief investment officer of Miller Value …
18 Jan 2021
Forget austerity – governments and central banks have no intention of cutting back
Global Economy

Forget austerity – governments and central banks have no intention of cutting back

Once the pandemic is over will we return to an era of austerity to pay for all the stimulus? Not likely, says John Stepek. The money will continue to …
15 Jan 2021

Most Popular

Why we won’t see a house-price crash in 2021
House prices

Why we won’t see a house-price crash in 2021

Lockdown sent house prices berserk as cooped up home-workers fled for bigger properties in the country. And while they won’t rise quite as much this y…
18 Jan 2021
Prepare for the end of the epic bubble in US stocks
US stockmarkets

Prepare for the end of the epic bubble in US stocks

US stocks are as expensive as they’ve ever been. How can you prepare your portfolio for a bubble bursting?
18 Jan 2021
The best investment trusts to buy for 2021
Investment trusts

The best investment trusts to buy for 2021

Sectors ranging from emerging markets to student accommodation look poised to do well this year, says David Stevenson, as he picks the best investment…
19 Jan 2021