It’s time for stockmarkets to go into rehab

"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.

MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

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."

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".