Stocks slip – but will they keep sliding?

American stocks have taken a tumble, but the global bull market has further to run, says Andrew Van Sickle.

859-Cohn-634

Gary Cohn (left): the adult in the room may be on the way out

"I have been recommending a defensive stance in [US] equities since at least February," says David Ader of Informa Financial Intelligence on Bloomberg. "That hasn't worked out so well." Equities ignored Ader and raced to new highs. But was he merely early?

Signs of stress are mounting. For one thing, the S&P 500 index has slipped for two weeks in a row, and the total 2.1% decline marked its worst fortnight since the one before the presidential election last November. Sabre-rattling between the US and North Korea is one problem, but it seems stocks are now "losing their already diminished optimism for the Trump administration", says Ader.

One of its main extremists, Steve Bannon, departed and markets barely bounced; nor did they react when the White House attempted to scotch rumours that National Economic Council Director Gary Cohn would resign. Cohn is one of the main people working on Trump's tax cuts, and is deemed one of the "adults in the room". Small stocks, meanwhile, which would have been the key beneficiaries of tax simplification and deregulation, have gone into reverse.

The market is also suffering from "bad breadth", says Lu Wang, also on Bloomberg. Fewer and fewer shares have spearheaded recent moves upwards. During the bounce when North Korea-related tension subsided, stocks making new 52-week lows outnumbered those reaching new highs on three consecutive days. This kind of imbalance has pointed to declines in the past.

Investors have also been paying up for growth stocks and ignoring value, adds Justin Lahart in The Wall Street Journal. Late in an economic upswing, profit growth tends to slow and profit margins narrow. So firms still capable of generating impressive growth such as Amazon, Facebook and Apple command a premium. Growth stocks raced ahead of value stocks in the latter stages of the big bull markets that ended in 2000 and 2007, although in the former case the outperformance lasted for the final three years.

Nonetheless, while equity markets may seem tired, and high valuations remain a headwind, it's hard to see why they should suddenly collapse into a bear market. Global growth has actually ticked up. In any case, as Switzerland's Finanz und Wirtschaft points out, central-bank tightening is usually what ends an economic and market upswing, and there is scant sign of it so far. The US is tightening in baby steps, and elsewhere monetary policy is about as loose as it gets. The global rally is long in the tooth, but it looks to have some life in it yet.

Recommended

The charts that matter: more pain for goldbugs
Economy

The charts that matter: more pain for goldbugs

Gold investors saw more disappointment this week as the yellow metal took a tumble. Here’s what’s happened to the charts that matter most to the globa…
18 Sep 2021
Kieran Heinemann: the history of shareholder capitalism
Investment strategy

Kieran Heinemann: the history of shareholder capitalism

Merryn talks to Kieran Heinemann, author of Playing the Market: Retail Investment and Speculation in Twentieth-Century Britain, about the history of t…
17 Sep 2021
Why it pays to face up to your investment mistakes
Investment strategy

Why it pays to face up to your investment mistakes

Buying stocks can be a complicated business. But selling stocks can be tricky, too – even if you sell for the right reasons. Max King explains how to …
17 Sep 2021
With the right political will, inflation can be defeated
Inflation

With the right political will, inflation can be defeated

Governments and central banks can easily control inflation, says Merryn Somerset Webb – they just need the will.
17 Sep 2021

Most Popular

The times may be changing, but don’t change how you invest
Small cap stocks

The times may be changing, but don’t change how you invest

We are living in strange times. But the basics of investing remain the same: buy fairly-priced stocks that can provide an income. And there are few be…
13 Sep 2021
Two shipping funds to buy for steady income
Investment trusts

Two shipping funds to buy for steady income

Returns from owning ships are volatile, but these two investment trusts are trying to make the sector less risky.
7 Sep 2021
Should investors be worried about stagflation?
US Economy

Should investors be worried about stagflation?

The latest US employment data has raised the ugly spectre of “stagflation” – weak growth and high inflation. John Stepek looks at what’s going on and …
6 Sep 2021