The central banks reach a dead end

Are central banks losing their touch? A month ago, the European Central Bank (ECB) announced another interest-rate cut, bank loans and a further €20bn per month of quantitative easing (QE). This sort of thing usually gives risky assets a fillip. "But the market isn't dancing to the ECB's tune," says The Wall Street Journal's Richard Barley. The pan-European Stoxx 600 index is marginally down on the month and the euro has ticked up. The markets haven't paid any attention to Japan's central bank either, judging by the yen's jump to a 17-month high against the dollar.

Since Lehman Brothers collapsed in September 2008, central banks have cut interest rates more than 650 times, as Katy Martin points out in the Financial Times one every three working days. "If the first cut is the deepest, number 649 can be expected to have at most only a marginal effect." With concern over asset bubbles caused by lower rates and money printing mounting, and the global economy still lacklustre, it would hardly be surprising if investors are losing their confidence in central banks' ability to juice economies and markets.

One manifestation of this loss of faith may be increasingly volatile markets. Martin highlights a UBS study showing that the mood switches faster than it did just four years ago. Bouts of jitters are more frequent and the gap between their worst phases "peaks in nerves" has declined from nine months to a year in 2012-2014 to three to six months now.

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Central banks' tendency to prop up asset markets when they wobble began with the US Federal Reserve in the 1980s, as Economist.com's Buttonwood blog notes. The policy "has a steadily higher price". Rates get lower and lower and borrowing and asset prices get higher and higher. The cost of returning to historically normal interest-rates keeps climbing: "imagine what would happen to homeowners if mortgage rates were 6%-7%". Central banks don't want that to happen and investors know it. "So thetwo are linked together like a barman and his most profitable customer, endlessly pouring one more drink to fend off the hangover and trying to forget about the cirrhosis that might set in."

But a hangover can only be delayed, not avoided, as investors may slowly be realising. And we could be reaching the end of this dysfunctional pattern. With inflation set to make a comeback in America, the Fed may soon be forced to raise rates faster than the markets expect. Soon we will discover "how much monetary pain" the debt-soaked world economy can take, says Ambrose Evans-Pritchard in The Daily Telegraph. "My guess is not much."

A bull market without earnings

"Cheap oil deserves a chunk of the blame," says Matt Egan on Money.CNN.com. Energy accounts for around 8% of the index, and the sector will make an aggregate loss for the first time since S&P began tracking these numbers in 1999. But even without oil, S&P 500 earnings are set to fall by almost 4%. The main problem is the stronger dollar: the index's constituents make around half their sales overseas. No wonder, then, that tech firms are set for a 5.9% fall in profits.

The outlook may now be improving: the dollar's ascent hasstalled, and the oil-price bounce will soon begin to bolsterenergy companies. However, the first three months of 2016 willstill mark the fourth successive quarter of shrinking profits.And the profits recession has come at a time when Americanvaluations were already pretty punchy, requiring strongearnings growth to justify them.The S&P 500 is on a 2016price/earnings ratio of almost 18, compared to a 15-yearaverage of 16. The cyclically adjusted price/earnings ratio(Cape) which is based on average earnings over the past tenyears is 60% above the long-term average.

What's more, the outlook's not much better across the Atlantic,as the FT's John Authers points out. Earnings have shrunkfor two quarters in Europe and are expected to expand byjust 0.5%, the lowest growth since 2009. It's just as well, then,that this bull market hasn't had to rely on fundamentals, suchas earnings growth, but has been able to fall back on centralbanks' liquidity splurge instead.