Is the penny about to drop?
What ends a bull market? Everyone has a firm idea of one sort or another on this — some crazy, some seemingly rational. It’s valuations. It’s policy mistakes. It’s the alignment of the stars. It’s interest rates. It’s October. It’s a run of corporate scandals and bankruptcies. It’s inflation reaching 4 per cent. It’s just time.
But to focus on any one thing is, I think, slightly to miss the point. A better way to look at the end of a bull market is to think of it as if it were trapped in an arcade coin pusher (or penny fall) machine — the ones into which you roll a coin to the back of a pile of coins in the hope that it will tip the rest over a ledge and into a collection drawer.
The piles of coins always look about to fall. But they don’t actually do so until long after it feels like they should. (This drives kids crazy, of course. If you want an afternoon to end in tears, end it on a penny fall). The current market is frustratingly jammed with coins.
Valuations are high across the board, in some cases back to 1929 levels. Stocks are being sold on stories rather than on financial fundamentals — “Look, there’s a car in orbit”! Prices have been rising for much longer than usual: if this bull market makes it to August it will be the longest in history. There is evidence of rising inflation all over the world.
Governments are in agreement with workers (correctly) that wages are too low and must rise. In the UK, pension deficits are a constant drag on capital investment. Dividend cover is too low. Investment trust premiums are too high. Everyone has more or less had it with quantitative easing. Bond yields are rising.
Global politics aren’t helpful. China has pulled back from its strategy of GDP growth at any cost. There is trouble ahead in the EU: the German and the Italian elections should make it clear that populism is still with us.
Possibly most important of all, the new Fed chair Jay Powell appears to be less interested in looking after stock markets at the expense of everything else than his predecessors. “We do not manage the stock market . . . I think the general thing is that the stock market is not the economy,” he said.
He might prioritise controlling inflation over continuing to pin all hopes on the wealth effect — the idea that if you make people feel rich by shoving up asset prices they will spend and in doing so save the real economy. Any one of these falling coins could by now have ended our long bull market. Rising yields in particular are rarely good for investors. None have. That’s something for which most of us are, of course, heartily grateful. After all, the bit of penny fall analogy that doesn’t work is this: crashing coins make you richer. In most cases, for most people, crashing markets don’t.
This leads us, as so many things do, to Donald Trump, the US president. Might his tariffs be the coin that tips the balance? Could be.
Mr Trump reckons that the US is global trade’s “big loser,” and that slapping 25 per cent tariffs on steel and 10 per cent on aluminium on top of the ones he has already put on solar panels and washing machines will show the rest of the world that he is all winner.
The problem is that even if we know the high costs of retaliation (the risk of escalating something relatively minor into a trade war) this is no guarantee that other trading blocs with supposedly less volatile leaders will not retaliate. As Jean-Claude Juncker, president of the European Commission, said this week, in the wake of the EU’s discussions about putting punishment tariffs on US agricultural products, steel and Harley-Davidsons, “We can also do stupid.”