The bull market celebrates seven years this month, but economists say that increased volatility and also the decreasing effectiveness of economic “bazookas” to rally risk assets suggest the bull is running out of steam.
Nonetheless, the S&P 500 has managed to rally since the post-financial crisis lows of March 2009, even while a European debt crisis, a fiscal deadlock in Washington along with a crash in oil prices have threatened to finish the bull market over the years.
Global stocks fell right into a bear market last month, however the S&P 500 narrowly avoided doing exactly the same and has since rallied from the February lows. That means the bull market is now 84 months long, the third-longest ever and closing in on becoming the second longest, an archive currently held through the 86 months of gains seen between June 1949 to August 1956.
Much of the current rally continues to be helped along by accommodative monetary policy from the U.S. Fed and easing policies generally all over the world. But the punch that such policies once had appears to be waning.
“The near-perverse market response to recent bazooka-like easing steps, beginning with the financial institution of Japan and its negative rates and then the ECB now, shows that we’ve almost reached the end of the line for central banks supporting asset prices and/or undercutting currencies,” said Douglas Porter, chief economist at BMO Capital Markets.
Still, that doesn’t suggest the end is right nearby.
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The record for the longest bull marketplace is held through the 113-month rally seen from October 1990 to March 2000, a bull that BMO Capital Markets’ senior economist Robert Kavcic says has numerous parallels with the current environment.
Kavcic highlights that in 1997, when that bull market was in which the current one is today, the Fed had just hiked interest rates by 25 basis points – as it did at its December meeting last year. But an abrupt downturn within the global economy, exacerbated through the shock of the Asian Financial Crisis, forced the Fed to backtrack on its policy.
Kavcic asserted any similar transfer of policy this year could extend the market rally to rival the one of the 1990s.
“Global headwinds were also blowing through 1997, causing the Fed to put off its tightening cycle with the latter stages of the year (it raised rates once in March ’97), before eventually cutting rates 75 basis points in 1998,” Kavcic wrote inside a note to clients.
Economists had earlier this year speculated if the Fed would be instructed to halt rate hikes or even cut again after a wave of promoting hit global markets in January and February, along with a 40 per cent crash in oil prices. Chairwoman Janet Yellen noted that “financial volatility” became a concern for the Open Market Financial Committee during a meeting in January.
But with markets rebounding, economists again are expecting the Fed continues to hike rates this season. Suppressing on rate hikes risks overheating the economy, as the U.S. labour market sits at a level the central bank considers full employment and inflation has started to pick up.
Kavcic also notes the risks of halting hikes or perhaps cutting, for example what went down in 1998, would risk throwing risk assets in to the type of bubble that stop the 1990’s bull.
“Many will reason that, by 1997, the bull market might have rolled over if the Federal Reserve didn’t retreat from tightening,” he said. “That shift, together with solid domestic economic fundamentals within the U.S., arguably helped fuel the ultimate run-up in valuations through early 2000, which ultimately ended badly as monetary policy had to aggressively catch up. We might be at an equally important stage from the cycle today.”
The Fed’s next policy meeting is going to be held from March 15-16, and markets are currently pricing within an almost zero per cent chance that the central bank will hike rates. June’s meeting is seen as the most likely to see a hike, though analysts is going to be watching now to determine whether such a move is going to be telegraphed within the Fed’s wording.