After such a long bull run, predictions of economic crash now inevitable

The past year has seen impressive increases in many of the world's stock markets

THE New Year has started on a highly optimistic note, and after the first week many markets ended at record levels as investors remained confident of strong global economic growth for the coming year.

The past year has seen impressive increases in many of the stock markets, but while they are all positive, the magnitude has varied. Despite many criticisms aimed at President Trump, he has presided over an incredibly impressive performance in the US stock market for 2017.

The Dow Jones finished up over 25 per cent, the S&P 500 was up 19.4 per cent and the NASDAQ was up over 28 per cent. This clearly reflects the so-called Faangs phenomenon: Facebook, Apple, Amazon, Netflix and Google (Alphabet).

The Far East joined in this exuberance. In Japan the Nikkei rose over 19 per cent in 2017 and the Hang Seng index was up a hefty 38.48 per cent. But things were much more subdued in Europe. The Euro Stoxx 50 index rose 6.5 per cent over the twelve months while the FTSE 100 was up 7.6 per cent.

After such a long bull run, predictions of a crash are inevitable. Indeed, on some measures the US market is approaching territory reminiscent of 1929 and 1999. However, this market is hard to read and there is a notable absence of the irrational exuberance which has characterised recent stock market crashes.

On the positive side, appetite for risk assets remains high, with a safety net of asset purchases by central banks around the world which could conceivably encourage more risk taking. As already mentioned, the economic growth forecasts for the coming year remain buoyant (although the UK has seen downgrades due to the uncertainty of Brexit). The recently approved tax changes in the US are seen as very positive for US growth prospects and other recent data releases have been mainly positive, adding to the optimism already prevalent.

The oil price has been creeping up, aided by worries of unrest in Iran which might lead to supply issues. Despite fears to the contrary, inflationary pressures seem to be limited, with wage rises remaining muted. This has led to optimism of a continuation of a low inflationary, relatively low interest rate environment.

On a more negative view, there are a number of factors which could derail this “goldilocks” scenario. Firstly the asset purchases by central banks also pose a real risk as well as providing support to the market. There is a generally held view that the gilt market is artificially inflated: the classic bubble scenario and value is very hard to find.

We can hardly exclude Brexit from the list of negative risks. Even if it eventually works out, the transitory period is full of uncertainty and has already led to a fall in company investment. Inflation should also feature on the negative risk list, although accurate predictions are notoriously hard to come by.

Currently the scale of momentum trading is unprecedented, with 30 per cent or more of US equities in passive indexed funds and the fear of missing out will be very influential in keeping the momentum going.

One note of caution: market returns tend to accelerate in the six months before the market rolls over – the doom merchants may yet be right, but timing remains a conundrum.

:: Cathy Dixon is a director at the Belfast office of Cunningham Coates Stockbrokers, a trading name of Smith & Williamson Investment Management ( SWIM). This article does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise. Investments carry risk and investors may not receive back the amount invested. The views expressed are those of the author and not necessarily of SWIM.

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