If anyone is feeling pleased about the slide on the stock-market today, it is probably Andrew Roberts, the RBS analyst who hit the headlines this week with a note advising everyone to ‘sell everything’. Probably rather sooner than he expected, and before any of his clients even had time to panic properly, prices have started to collapse. Almost every day, there are hefty three digits falls, and pictures editors are running out of their stock photos of despairing traders looking glumly into their Bloomberg terminals.
The numbers suggest that a bear market, usually defined as a 20 percent drop off the highs, is now very close. China’s Shenzhen index is already there. The FTSE is down from just shy of 7,000 in July to 5,780 now. The S&P 500 has fallen from 2,135 to less than 1,900. As if the Germans were not already feeling gloomy enough, their key index, the DAX, has been hit the hardest, dropping from 12,300 last July to 9,500 now. By any measure, those are dramatic falls.
Of course, the bull market that started not long after the last crash was already looking pretty long in the tooth. If it had lasted until April, it would, according to Bank of America Merrill Lynch calculations, have become the second longest bull run in history (overtaking the post-WWII rally that ran from 1946-1951). Looked at in those terms, it is about as surprising as a cold snap in January, or some chaos in the Labour Party – it is just one of those things that happens from time to time.
But that doesn’t mean it is of no consequence, or doesn’t need to be explained. You will read lots about how it is being driven by the collapse in Chinese equity prices, or by the falling price of oil. But, in fact, the culprit is something else – the US Federal Reserve.
It doesn’t make much sense to blame China. It might be the second biggest economy in the world, but its stock market is tiny, and has little correlation to the rest of the world. The fall in the oil price is an even stranger explanation. If you happen to have the Mercedes dealership in Qatar, or you run a casino in Berkeley Square, that is obviously bad news. But for everyone else, cheaper oil is usually a positive. It costs us less to fill our tanks, and to heat our homes, and that means we have a bit more money to spend on other stuff – indeed, you can already see the impact in rising retail sales (even Tesco had a decent Christmas).
What has actually spooked the markets is rising US interest rates. On 16 December, the Fed Chair Janet Yellen raised rates by 0.25 percent, the first increase in nine years. On the day of the rise, the Dow jumped more than 200 points to 17,700, as most investors decided it was a sign the American economy was getting back to normal. By the time everyone got back from Christmas, however, they decided they were not so sure about a world of rising interest rates and a stronger dollar. In reality, the markets have become hooked on cheap central bank money. That might be a good or a bad thing – that is an argument for another day. What is certainly true is that, just like any addiction, it can’t be ended without a lot pain.
If the sell-off gets much worse, that will probably be postponed. The Fed had been looking at four rates rises this year. If there is carnage on Wall Street, that will be quietly forgotten about. Embarrassing though it might be, the single quarter point raise could even be reversed. Neither of Yellen’s predecessors, Alan Greenspan or Ben Bernanke, were willing to let the markets tank, and it is unlikely that Yellen will want to either if she can possibly avoid it. As for this country, in the admittedly unlikely scenario that the Bank of England governor Mark Carney was contemplating a rate rise, that will have been forgotten about now. If he pushed that through, Roberts’s ‘sell everything’ warning really would be vindicated.
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