Business

Bull Market Begins New Year With Unstable Foundations

The writer is the editor-in-chief of MoneyWeek

Imagine you put money into a fund that tracks the MSCI World Index a year ago and then disappeared in the news for a long time.

Now you will see that you have earned about 20%. If you choose the North American index, that number will be 25%. Not bad. You’ll be very pleased – and if asked what financial conditions you’d like to see in 2022, you’d say much the same thing. Until you watch the news. At that point, you can change your mind.

We don’t see clear conditions for a stock market bull in 2021. That’s the beginning of a year of global shutdowns – the vaccine that is supposed to help us get back to normal. after a rush but it turned out not to work as well as we had hoped. They reduce serious illness but do not prevent infection and as a result we are constantly restricted.

It was also the year that the budget deficits of both the United States and the United Kingdom rose to their highest levels in 1945, public debt levels rose sharply (not far from 100% of gross domestic product in the UK – the highest since 1963). ) and central banks continue to buy. a large amount of their government debt. At the same time as energy prices rose (even coal prices doubled), a large ship blocked the Suez Canal for an oddly long time, most industries were in short supply, labor was hard to come by. and inflation returned strongly.

In the UK, the retail price index (not an official measure of inflation but the longest on record) hit 7.1% – the biggest annual increase in more than 30 years. The consumer price index stood at 5.1%. In the US it is 6.8% and in Germany it is 6%. There was a time when the Bank of England said CPI would peak at 4% and then disappear. They don’t say that anymore. There are good ones too (at least for the markets).

As governments poured money into almost every pocket they could find and central banks provided apparently limitless monetary policy support in the form of super-low interest rates and money printing, GDP recovered. strong – nearly all advanced economies have recovered to levels close to their pre-Covid peaks.

Earnings are similar: current estimates show US corporate earnings growth at 43% for 2021 (in the UK, it’s 73%). If the market is a motivational machine like anything else, perhaps this year’s stock market gains make sense, too.

Even so, we at least end the year with a strong US valuation. With the cyclically adjusted price/earnings ratio, the US market is priced higher than it was in 1929, 1973, and 2007. Inflation is on the rise, central bank stimulus dwindling, and Omicrons. upsetting the already fragile apple. Not exactly a Goldilocks script, is it?

What could then happen that you might reasonably think you could get double-digit stock market returns in 2022 – the fourth year in a row? Great number of. The important thing to think about is how market conditions could change for the better to justify the price increase.

For that to happen, you will need Covid to be recognized as an endemic and manageable virus that underlies policy rather than its entire focus. This is possible, with growing evidence that the Omicron variant is milder than the last and that antivirals will soon be widely available.

However, with the current default of policy panic, it is not one. As a result, you will need momentum to grow in the global economy. This can also happen because both businesses and consumers have cash. But the signs are not brilliant. In the US, consumer sentiment and manufacturing are both weakening. In the UK, the latest GDP numbers are far from encouraging (third quarter economic growth has been revised down to 1.1%).

You also need inflation to start falling, something that seems pretty unlikely when energy prices are still rising rapidly and the labor market is still very tight. You need central banks to figure out how to act without making nasty policy mistakes. I wouldn’t bet on this – they don’t work. And you need increased profits (to bring valuations down without stock prices) when earnings are already at record highs as a percentage of GDP in the US, costs are rising across the board, and new corporate taxes are coming soon. will not exactly help.

The relative case for stocks – that they are at least cheap relative to bond yields – also won’t last long as bond yields start to rise. You may note that the U.S. market was also relatively undervalued relative to U.S. Treasuries at their 2007 peak, one of the worst periods ever to invest in equities, according to analysts. analyst at Ned Davis Research. This won’t be a problem if we know that money will continue to flow into the market regardless.

But that is far away: as analysts at Deutsche Bank have pointed out, the end of monetary stimulus after a decade of enthusiastic quantitative easing programs would mean the end of “natural currencies.” do” for the market. And rising bond yields can easily push existing funds into fixed income.

Add all of this up and 2022 looks like it comes with a range of possible outcomes. They could, just might, come together to give you much of the same. But the risk is very high – 2022 may be less dangerous for your health than 2021, but I suspect it could be more dangerous for your wealth.

Source link

news7h

News7h: Update the world's latest breaking news online of the day, breaking news, politics, society today, international mainstream news .Updated news 24/7: Entertainment, Sports...at the World everyday world. Hot news, images, video clips that are updated quickly and reliably

Related Articles

Back to top button