It’s time for stockmarkets to go into rehab

Stockmarkets are struggling to ween themselves off central bank money-printing.

"Markets need to check into the Betty Ford Center and go into rehab, to wean themselves off this addiction to central bank support," says Adrian Miller of GMP Securities.

Last week the S&P 500 saw its worst three-day drop since 2011, and hit six-month lows. European and UK stockmarkets (see chart) slid to their lowest levels in over a year.

But on Friday markets perked up as central bankers made soothing noises. The Bank of England's (BoE) Andy Haldane said the BoE could keep interest rates lower for longer than previously anticipated.

In America, Federal Reserve member James Bullard said the US central bank should continue with its quantitative-easing (QE), or money-printing, programme rather than wind it up in October.

For five years now policymakers have "pumped up asset prices to buy time for a lasting recovery", says Philip Aldrick in The Times.

Zero interest rates and injections of printed money led to an unprecedented liquidity boost for markets. So much so that bad data often boosted stocks, as they implied further money printing and another wave of cash reaching equity markets.

Now that the UK and US economies are improving, interest rates should rise. But markets have relied on central-bank liquidity for so long, "like a small child holding his dad's hand when learning to ride the bike", that they are scared to go without, says The Economist's Buttonwood blog. "It is time to let go of the hand now, but there will be bumps and bruises along the way."

714-UKX

But investors hoping for more QE shouldn't expect the UK and US to turn on the taps again in the near future.

For one thing, not all members of each central bank are behind the idea. And with both economies improving, central banks should surely keep their powder dry for a major economic shock such as another eurozone crisis rearing up, perhaps.

If and when that happens, markets might finally lose faith in central banks' stimulus measures and realise they aren't omnipotent, says Gavyn Davies in the Financial Times.In which case, markets will "have entered much more dangerous waters".

Recommended

How not to get beaten by inflation
Inflation

How not to get beaten by inflation

With inflation at 9%, and the bank rate at 1% you’re not going to get a real return on cash. But there are steps you can take to beat inflation, says …
19 May 2022
Barry Norris: we’re already in the 1970s. Here’s how to invest
Investment strategy

Barry Norris: we’re already in the 1970s. Here’s how to invest

Merryn talks to Barry Norris of Argonaut capital about the parallels between now and the 1970s; the transition to “green” energy; and the one sector w…
19 May 2022
Tech stock crash – dotcom bust 2.0 is upon us
Tech stocks

Tech stock crash – dotcom bust 2.0 is upon us

It’s carnage in the tech sector as the market crashes. But that spells opportunity for canny investors, says Matthew Lynn
19 May 2022
The tech-stock bubble has burst – but I still want a Peloton
Stockmarkets

The tech-stock bubble has burst – but I still want a Peloton

Peloton was one of the big winners from the Covid tech boom. But it's fallen over 90% as the tech stock bubble bursts and and everything else falls in…
19 May 2022

Most Popular

Barry Norris: we’re already in the 1970s. Here’s how to invest
Investment strategy

Barry Norris: we’re already in the 1970s. Here’s how to invest

Merryn talks to Barry Norris of Argonaut capital about the parallels between now and the 1970s; the transition to “green” energy; and the one sector w…
19 May 2022
The ten highest dividend yields in the FTSE 100
Income investing

The ten highest dividend yields in the FTSE 100

Rupert Hargreaves looks at the FTSE 100’s top yielding stocks for income investors to consider.
18 May 2022
Share tips of the week – 20 May
Share tips

Share tips of the week – 20 May

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
20 May 2022