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

The world’s fund managers are getting very bullish – be careful out there
Stockmarkets

The world’s fund managers are getting very bullish – be careful out there

The latest survey of fund managers shows them to be extremely bullish on all the same things. And that, says John Stepek, means the market is in dange…
21 Jan 2021
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
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
A beginner’s guide to inflation – everything you need to know
Inflation

A beginner’s guide to inflation – everything you need to know

One of the most frequently mentioned topics in the news these days is inflation. But what exactly is inflation and how does it affect the economy and …
18 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