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.

924_MW_P04_Markets_Bottom
China's economy is unlikely to reaccelerate

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.

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.

Recommended

The British equity market is shrinking
Stockmarkets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
The charts that matter: China’s recovery bolsters the yuan
Global Economy

The charts that matter: China’s recovery bolsters the yuan

China's strengthening currency is a sign of confidence in the country's economic recovery. John Stepek looks at the yuan chart, and all of the others …
19 Sep 2020
Will a second wave of Covid lead to another stockmarket crash?
Stockmarkets

Will a second wave of Covid lead to another stockmarket crash?

Can we expect to see another lockdown like in March, and what will that mean for your money? John Stepek explains.
18 Sep 2020
Why China appeals to good investors
China stockmarkets

Why China appeals to good investors

China is one of the few places left to good investors hoping to make a decent return, says Merryn Somerset Webb.
14 Sep 2020

Most Popular

Will a second wave of Covid lead to another stockmarket crash?
Stockmarkets

Will a second wave of Covid lead to another stockmarket crash?

Can we expect to see another lockdown like in March, and what will that mean for your money? John Stepek explains.
18 Sep 2020
Here’s why you really should own at least some bitcoin
Bitcoin

Here’s why you really should own at least some bitcoin

While bitcoin is having a quiet year – at least in relative terms – its potential to become the default cash system for the internet is undiminished, …
16 Sep 2020
James Ferguson: How bad data is driving fear of a second wave of Covid-19
UK Economy

James Ferguson: How bad data is driving fear of a second wave of Covid-19

Merryn and John talk to MoneyWeek regular James Ferguson about the rise in infections in coronavirus and what the data is really telling us.
17 Sep 2020