The old stockmarket adage of ‘sell in May and go away’ may be a warning that arrives too late this year, says Jeremy Warner in The Sunday Telegraph. America’s S&P 500 index, which usually sets the tone for global markets, slumped by 6% last week, its worst weekly fall in more than two years. The same applied to the Dow Jones index. Equities in Japan and Europe fell sharply too.
“We dare you to find just one reason for the drop,” says Ben Levisohn in Barron’s. The chief culprit was probably sabre-rattling between the Trump administration and China (see box below). The president confirmed that he intended to impose tariffs on around $50bn of steel and aluminium imports, while China retaliated with plans for levies on 128 US products worth a total of $3bn of imports. The arrival of the notoriously hawkish John Bolton as Trump’s national security adviser will have rattled those fearing conflict with Iran or North Korea.
A growth scare
The growing clamour for tighter regulation of the market-leading technology sector (see page 26) is another key factor. The FANG + index tracking the US and Chinese tech giants has suffered its second 10% fall of 2018 in the past few days. The prospect of lower future tech-sector growth is worrying, but it now also appears that the macroeconomic data has weakened, says John Authers on FT.com.
The PMI surveys of manufacturing activity for Germany, France and the eurozone have all slipped further from multi-year peaks this month. “Western Europe’s strong growth was arguably the pleasantest and most important surprise that helped drive great equity returns the world over. It begins to look as though that has already peaked.” It’s not just Europe’s growth that is no longer accelerating.
A Citigroup index charting the extent to which data in the ten biggest economies exceeds or undershoots expectations, the “economic surprise” indicator, shows that the data has weakened in recent weeks. At present slightly more surveys are undershooting expectations than exceeding them; only a few months ago, positive surprises dominated.
Can stocks keep going?
It hardly helps matters that US earnings expectations are already stretched and valuations high. And investors hoping more earnings momentum is on the way should remember that “rising inflation and rising wages rarely lead to higher profits”, says Louis-Vincent Gave in a Gavekal research note.
As trouble piles up, the worry is that the bull market has climbed so high in the past nine years that it is running out of oxygen. We are “waiting for the final snowfall that sets off the avalanche”, Fund Expert’s Brian Dennehy told The Times. That may be overblown, given that global growth remains healthy and monetary policy extremely loose. Still, as Louis-Vincent Gave says, “it is looking increasingly as if the uncomplicated, low-volatility bull-market-in-everything…. is now no more than a pleasant memory”.