Stockmarkets will struggle now that Goldilocks is gone

Until recently, stockmarket investors could count on a “Goldilocks” scenario: growth was robust enough to allay fears of a relapse into recession but weak enough to keep central banks pouring liquidity into the system. But not any more.

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China's economy is unlikely to reaccelerate
(Image credit: Nikada)

Equity investors are struggling to adjust to "an environment ... very different from the benign... one they have enjoyed since the recovery from the financial crisis", says Robin Wigglesworth in the Financial Times.

Until recently, investors could count on a "Goldilocks" scenario: growth was robust enough to allay fears of a relapse into recession but weak enough to keep central banks pouring liquidity into the system. But now they are "removing the punchbowl", as Jim Smigiel of SEI Investments puts it.

This year, the world's central banks will collectively drain liquidity from the global system for the first time in almost ten years. In this environment, fundamentals matter again. Highly valued tech stocks are assessed far more harshly, while it hardly helps that US earnings growth is now falling. US stocks' outperformance "was squarely due to strong earnings", says Louis Gave on Gavekal Research.

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Donald Trump's corporate tax cuts temporarily helped to boost profits; the S&P 500 grew profits by 26% year-on-year in the third quarter, the best performance since 2010. But earnings growth is expected to halve in the fourth quarter. Now interest rates are going up, making record corporate debt pricier, and a strong dollar is crimping exports.

The question, according to Gave, is "if US equities are no longer going to rise on the back of strong earnings, can non-US markets pick up the slack?" He argues that the earnings of non-US firms could benefit from lower oil prices.

Yet much of the earnings growth in emerging markets and Europe has been driven by the rise of the Chinese economy, and "there are few reasons to think that China's economy is set to reaccelerate". The fuel powering global stocks is dwindling.

Marina has a PhD in globalisation and the media from the London School of Economics, where she worked as a teaching assistant on the MSc Global Media. In 2014 she was invited to be a visiting scholar at Columbia University's sociology department in New York.

She has written for the Economists’ Intelligent Life magazine, the Financial Times, the Times Literary Supplement, and Standpoint magazine in the UK; the New York Observer in the US; and die Bild and Frankfurter Rundschau in Germany. She is trilingual and lives in London. She writes features and is the markets editor at MoneyWeek..