The end of the Bull Market?

| July 26, 2007 | 1 Comment
The end of the Bull Market?

It’s six weeks now since Morgan Stanley issued a stark pronouncement - European equities markets were about to take a big hit, predicting as much as 15% wiped out from equity value.

World markets were already aware that the days of cheap loans were over, and even before the warning we saw the US market slumping, warnings of over-valuation in worldwide property markets, serious concerns about the levels of debt powering market investment, and especially in terms of private equity investments.

Yet if the days of easy money were over, why hadn’t this hit the realities of the stock markets?

The trouble is, stock investments aren’t driven by logic, but instead by running with the herd to cash in as much as possible before the bulls turn bearish.

This is almost certainly what we’ve been seeing recently, with the Dow Jones hitting 14,000 points, and the FTSE 100 climbing to 6700, as well as other records set on exchanges across the world.

And then today, finally, the bulls appear to be in retreat as the bears set in place their risk reduction strategies as the FTSE 100 fell to 6200, with the Dow Jones and other major stock exchanges seeing losses of around 3%.

The question is - what next?

The days of cheap cash are gone - no doubt about it - and companies that financed it are suddenly looking at their books and deciding much of the debt and risk they’ve paid for could be worthless.

Inflation is on the rise, short-term and long-term interest rates are on the rise, houses prices are freezing or falling, consumer spending is falling, and the good old days of spend and return are gone.

The current economic cycle is busting, after being pushed beyond it’s natural limit, which was arguably present in 2004, but low interest rates continued to power it on.

While serious recession, even stagflation, remain worries rather than definite realities, the hard fact is that we now face a long wind down from the previous economic cycle - which because it was unnecessarily extended, means that the wheel of economic activity must roll around further before we reach the next boom period.

Ernst & Young suggest we’ve hit an economic trap that could last until at least 2012 before economic indicators will have a chance to catch up and set again in motion the new phase of economic growth.

That’s not to say world - let alone UK - economic growth is about to hit a brick wall - and certainly not in the immediate future. World financial conditions are still not adverse enough, but the slowdown is on the cards as the mindset of debt risk so ridiculously encouraged now sees its consequences revealed.

And make no mistake - though companies may find the going tough, as ever, it’s the ordinary people who will feel any impact the most.

Somehow, I’d like to feel there’s a lesson in this somewhere - that somewhere, somehow, banks will become far more discerning when it comes to risk lending. Unfortunately, human nature’s desire for greed, capitalism’s encouragement of it, and the lending institution’s of the world’s will to feed it, means that perhaps what we’re viewing now is not simply a turning point - but yet another incident of history to be repeated over the coming decade.

Investment and finance doesn’t have to be unreasonably bullish - but for the time being, it’s unlikely we’ll see the behaviour properly mollified once the economic cycle turns and opportunity beckons again.

Maybe the bull market is over for now - but make no mistake, the bulls will be back in herds again, when they can.

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  1. Emma S says:

    Don’t dismiss the bull traders yet. Slow witted and headstrong, they don’t leave a fight quickly. Expect further falls today, but also expect the bulls to lead a series of weak rallies, especially on Monday, which will probably peter out but prevent the FTSE hitting freefall, instead rolling down a more gentle incline. They’re not called bulls for nothing, you know. :)

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