Are stockmarkets heading for a fall?

America’s S&P 500 stockmarket index has gained 30% over the past year. Valuations may be high, but that doesn't necessarily mean investors should sell. High valuations can always go higher. 

US Federal Reserve building
The US Federal Reserve could rattle markets when it tapers its bond purchases
(Image credit: © Getty Images)

Are stockmarkets too quiet? asks John Authers on Bloomberg. America’s S&P 500 index has gained 30% over the past year. Its climb has been serene. Since the 2020 US presidential election, the index has not once fallen so much as 5%.

The economist Hyman Minsky noted that “stability creates instability”: periods of calm “lead to overconfidence and excessive speculation” that sow the seeds of a future crash. The debt markets certainly look complacent – yields on US junk debt are at their lowest ever level, reflecting record prices.

Corporate debt boom

It is a similar story in Europe, says Yoruk Bahceli on Reuters. Earlier this month yields on euro-area junk bonds fell below inflation for the first time. Investors usually expect healthy compensation for the risks of holding junk debt, but the 2.3% yield on the ICE BofA euro high-yield index is now below the eurozone’s 3% inflation rate.

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“Borrowers have never had it so good,” says Katie Martin in the Financial Times. Companies are rushing to borrow cash on the cheap; this month has seen bond markets enjoying record breaking days for issuance. The launch of Spain’s inaugural €5bn green bond was oversubscribed 12 times.

The rush to raise money now suggests that executives don’t think these benign conditions will last. Spying rising wage bills and soaring shipping costs, corporate “chief financial officers know better than anyone how inflation pressures are building up in the system”.

The S&P 500 has enjoyed 54 record closes this year, says Caitlin McCabe in The Wall Street Journal. Analysts fear that valuations have gone too far and that rising inflation will hit margins and thus profits.

“What good news is left?” ask Bank of America strategists. “A lot of optimism is already priced in.” The S&P 500 has had a shaky start to the month, falling 1.4% since 1 September. A “bumpy autumn” may lie ahead.

Market corrections don’t just happen, says Al Root in Barron’s. Effective vaccines, a growing economy and loose fiscal and monetary policy are all giving markets a boost. US stock valuations may be vertiginously high, but “valuation alone won’t kill the market”. High valuations can always go higher.

Pessimists point to the Delta variant and the Federal Reserve’s taper of bond purchases as reasons for caution, says Eric Rosenbaum for CNBC.

The US is also heading for a political quarrel over the debt ceiling. Congress needs to authorise more federal borrowing or parts of the government could be shut down as soon as next month. But these concerns don’t necessarily mean investors should sell. As famed fund manager Peter Lynch once said: “Far more money has been lost by investors trying to anticipate corrections than lost in the corrections themselves.”