Stockmarkets have had a “smashing rally” this year, says Alan Abelson in Barron’s. America’s S&P 500 index has gained 16% in 2012 and has returned to its late-2007 level. European stocks have jumped by 14%; their British counterparts are also close to multi-year highs.
Chalk it up to central banks, with the Bank of Japan joining America’s Federal Reserve in printing more money (quantitative easing, or QE) and the European Central Bank promising to buy up indebted states’ bonds in order to keep their borrowing costs at reasonable levels. “For the short term, the availability of so much money on such generous terms keeps things bobbing along and greatly lengthens the odds against disaster,” says John Authers in the Financial Times.
In the longer term, however, the likelihood is that QE is just “a rush of blood to the head that does little for long-term growth”, as Buttonwood puts it in The Economist. Previous QE programmes have hardly worked miracles. Injecting money into the system seems to have little impact on demand, which is subdued in the years after financial crises.
That’s because both the public and the private sector tend to focus on gradually reducing their debts. So the danger for markets is that once the sugar rush wears off, investors’ attention will return to the global downturn, and falling corporate earnings forecasts. So a sustainable bull market looks some way off.
Growth is only likely to get going in earnest once the developed world’s hangover from the credit bubble has worn off. Until then, any upswing is likely to be capped by deleveraging, says Authers. Another threat is that if global growth does accelerate, the prospect of central banks raising interest rates and withdrawing liquidity as a result will unsettle markets. Moreover, “governments will lean onerously on the private sector” as they try to cut their debts, which will hit profits.
On the other hand, if disaster appears to be looming, central banks will pour more money into the system. So all this points to further successive “waves of fear and hope” that keep markets stuck in a broad range. That’s the typical pattern after a financial crisis, and it can last over a decade, says Authers. It still makes sense for long-term investors to buy historically cheap assets, such as European stocks. But Western markets as a whole seem set to drift for a few more years yet.