A stellar run for stocks everywhere

Another week, another record. The Dow Jones index reached its 70th new all-time high of the year last week, breaking 1995’s record of 69. The benchmark S&P 500 has also hit a new peak. It was a “vintage year” for equities everywhere, as Fidelity’s Tom Stevenson notes in The Sunday Telegraph.

“Outside the UK, which has had other things on its mind, stock markets have delivered fantastic returns.” Most major indices or regions have managed to rack up double-digit gains. The global equity bull market that began in March 2009 is now the second-longest in history. Can it last?

The good news is in the price

The backdrop is certainly auspicious. The world economy took ages to recover from the global financial crisis, but it has now finally shaken off its hangover. Stronger growth in Europe, the US and emerging markets implies that global GDP should climb by 3.8% in 2018, reckons Morgan Stanley – the best performance since 2011.

Global monetary policy is still very loose, while extra fiscal stimulus is on the cards thanks to the Trump administration’s tax package. Major economies are at different points in the business cycle, so the risk of the global business cycle getting too hot is relatively low. America’s expansion is in its tenth year; Europe has barely got started. All this points to healthy earnings growth.

The key question is how much to pay for those earnings. Europe and especially Japan remain reasonably priced, but US stocks are extremely overvalued: only in the 1920s and 1990s bubbles has the cyclically adjusted price-earnings ratio been higher. This year’s technology rally, in addition to the bitcoin bubble, adds to the feeling that “sentiment has taken over from fundamentals” in the US market, says Stevenson. It seems we are “in the final inning of this game”.

No catalyst for a slump yet

Still, while the bull may be getting long in the tooth, there is no immediate trigger for a bear market in sight. A recession is unlikely for now. We have long been worried that investors are underestimating the odds of inflation making a comeback, especially in the US, implying unexpectedly rapid interest-rate hikes that would certainly give asset markets a nasty surprise. But this may not become an issue until later in the year, given subdued wage growth on both sides of the Atlantic.

An outbreak of Trump-induced protectionism would be a shock, and there are, as ever, several geopolitical flashpoints for investors to fret about. But the signs point to further, albeit more subdued, gains. The post-crisis rally, inflated by central-bank stimulus, will come to a sticky end in the not-too-distant future – but perhaps not in 2018. 

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