6 reasons it's an unfriendly world for stocks
Between the crisis in Crimea, an apparent slowdown in China and a looming end to loose-money policies around the globe, it's shaping up to be a rocky patch for equities.
By Alen Mattich, The Wall Street Journal
It's shaping up as a really rocky patch for the equity markets.
The crisis in Crimea doesn't look set to go away anytime soon. There's ever more evidence of China's slowdown. Ultra-accommodative developed market monetary policy looks to be approaching its sell-by date.
U.S. earnings growth looks to have peaked. Valuation multiples look particularly rich. And it's been a long time since the markets suffered anything approaching a typical correction.
Taking each point in order:
1. Not only is it growing likely that Russia will annex Crimea, but Russian President Vladimir Putin seems to have his eyes on eastern Ukraine, with its large ethnic Russian population. Western intervention will be limited by German and eastern and central Europe's dependence on Russian gas.
What's more, Russia is no longer the superpower it once was. Though this will remain a regional conflict, it has increased market uncertainty and therefore lifted the risk premium investors demand for holding assets.
2. China is more important than Russia. Chinese demand has been a major driver of commodity prices, of investment in commodity-producing countries, of demand for components from regional suppliers and, increasingly, of luxury goods from high-end western manufacturers. And China is slowing.
Fixed-asset investment growth, industrial production growth and retail sales growth have all been slowing. The price of industrial metals like copper and iron ore has collapsed, and China's purchasing managers surveys have been worrying. This has fed through to signs of corporate distress, including default and raised concerns about a crisis among China's shadow banks. Spillover would undoubtedly have significant effects in developed markets.
3. Notwithstanding geopolitical developments, the U.S. Federal Reserve is determined to reduce the pace of its asset purchases with a view to ending them in the second half of this year. And despite still above-trend unemployment, a pickup in wage growth could worry the Fed enough to start tightening policy sooner rather than later.
The U.K. faces similar dynamics, with strong growth and rampant house price inflation raising questions about how long the Bank of England might be able to sustain near zero interest rates.
In the eurozone, despite talk of the European Central Bank launching its own quantitative easing program, there is reason to be skeptical -- it could be politically dangerous. Yet with credit shrinking the eurozone economy continues to struggle and faces outright deflation.
In Japan there are growing doubts about how successful Abenomics is proving to be. Prime Minister Abe suggested the Bank of Japan could double its QE program. Whether it works any better in the future than it has done hitherto is something else entirely.
What's more, New Zealand already started to tighten policy this week, the first developed economy to do so this cycle.
4. U.S. corporate earnings growth seems to be slowing sharply. And as the labor market tightens further, the balance between profits and wages is likely to tilt more towards the latter and away from historically high levels of profitability as a proportion of the total economy. Which would make sense, corporate margins tend to be mean-reverting and they've been unusually high for some time.
5. Equities are expensive, particularly U.S. shares. Economist Robert Shiller's cyclically adjusted price-to-earnings ratio for U.S. shares show they're trading on more than 25 times earnings. That's approaching peaks hit before the financial crisis, is some 50 percent above a long-run average of around 15 times and is around levels that preceded market busts, excluding during the tech and telecom bubble.
European equities are less richly priced, but they've also moved ahead sharply since their 2009 lows. Germany's index recently hit all-time highs while the U.K.'s FTSE 100 is not far short of them.
6. Markets tend to correct, even during bull runs. Except lately, the "corrections" have been at most dips of a couple of percentage points before buyer euphoria sent prices racing ahead again.
Fund manager John Hussman has written about these cycles of ever shallower retracements before new highs are hit as symptomatic of market mania rather than rational investor buying on fundamentals. He forecasts "zero or negative nominal returns on every horizon of less than 7 years."
More from The Wall Street Journal
I keep hearing people telling me how great Wall Street has been to them. One person says
"his Stocks Has Risen 60 and even 70 percent" some even claiming 120%..
Did You Sell Any of Those Stocks??? Did You Make Any Money..
The only people who have made money in this market are the COE's and the Executives on the boards who SOLD STOCK ... By the thousands of shares given to them for signing bonuses when they were hired..
YOU , You're setting on a stock that will take 25 years to get your investment out of...
If any at all.....
So tell me when you sell it and you're not just "Holding a Worthless Piece of Paper"
And I'm talking about all you people out there who are holding this over priced Stock
that you've bought in the past 3 years... and I'm taking to the "Average Joe" not some day trader..
A man working for Ford's with hopes of retiring.. or a nurse or a lab tec.. Let Me Know when you sell
But yesterday they said there were five reasons why this wasn't a market bubble. I'm so confused!
I think a nutless monkey could write finance articles.
Everybody wants to blame somebody:
MSNBC has always been pro Wall Street
The fact of the matter is "Wall Street Is Over Valued"
INFLATION boys,,,, There's no one to blame but Government intervention
To Much Money propping up the DOW,
Bonds "AREN'T" being bought and Interest Rates "ARE" going UP..
Get ready for a big adjustment .... A true Market Value..
Another real reason is China is definitely slowing down and China government is working for their people so they are not willing to bail out the riches by bailing out failed corporations. So they let them default.
Another reason is Corporations can not cut employees to show profits any further.
*** Another real reason is labor market tightens is not true, that is why they still extend unemployment.
And the Crimea vote is effecting our Markets how...?? Guess I might need some clarifications..?
After the so-called "friendly vote" our DOW is up 150-170 points....Hmmm ??
Maybe CGT has an insight or a direct correlation explanation, concerning the manipulation..?
More at Noon or after the Close..
Lsoft:If you were smart you would have signed up for Obamacare and saved big bucks and
got better coverage.I have friends and relatives who did.
Chinese internal consumption is 20% of its economy which is 1/3 of the USA's, where internal consumption is 83% of our economy. This is a "sky is falling" article. You have to stretch the truth to find reasons to call stocks "unfriendly."
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