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

Why investment forecasting is futile
Investment gurus

Why investment forecasting is futile

Every year events prove that forecasting is futile and 2020 was no exception, says Bill Miller, chairman and chief investment officer of Miller Value …
21 Jan 2021
Forget austerity – governments and central banks have no intention of cutting back
Global Economy

Forget austerity – governments and central banks have no intention of cutting back

Once the pandemic is over will we return to an era of austerity to pay for all the stimulus? Not likely, says John Stepek. The money will continue to …
15 Jan 2021
Why investors should beware of India’s surging stockmarket
Emerging markets

Why investors should beware of India’s surging stockmarket

The BSE Sensex benchmark index has soared by 90% since March, largely driven by foreign investors. But India's bull market is very vulnerable.
15 Jan 2021
US stocks are obviously in a bubble. But is it a rational bubble?
US stockmarkets

US stocks are obviously in a bubble. But is it a rational bubble?

Everyone wants to know if the US stockmarket is in a bubble. But that is the wrong question, says Merryn Somerset Webb. Of course it’s a bubble. The r…
14 Jan 2021

Most Popular

A simple way to profit from the next big trend change in the markets
Investment strategy

A simple way to profit from the next big trend change in the markets

Change is coming to the markets as the tech-stock bull market of the 2010s is replaced by a new cycle of rising commodity prices. John Stepek explains…
14 Jan 2021
Forget austerity – governments and central banks have no intention of cutting back
Global Economy

Forget austerity – governments and central banks have no intention of cutting back

Once the pandemic is over will we return to an era of austerity to pay for all the stimulus? Not likely, says John Stepek. The money will continue to …
15 Jan 2021
Here’s why markets have shrugged off the US political turmoil
Investment strategy

Here’s why markets have shrugged off the US political turmoil

Despite all the current political shenanigans in the US, markets couldn’t seem to care less. John Stepek explains why, and what it means for your mone…
7 Jan 2021