Global stocks kicked off the new year by rallying to reach new lifetime highs. Major indices across the U.S., Europe, and Asia witnessed significant gains in the year’s first two trading days; the Indian bourses were slower to gain traction. The strong start suggests that stocks may be all set to carry on their momentum from 2017, which saw major indices offering solid double-digit returns to investors. A significant feature of the present bull market in stocks has been its broad-based participation, with both developed and emerging markets benefiting from it. The S&P Global Broad Market Index, for instance, rose by an impressive 22% during the year. Indian stocks are among the biggest winners of the rally. Macroeconomic tailwinds such as improving economic growth in the U.S., Europe and emerging markets, better corporate earnings, and tax reforms passed by the Trump administration could explain some of the euphoria. But the extreme broad-based nature of the rally adds to fears that it may be driven primarily by excess fund flow into stocks rather than a secular improvement in economic fundamentals. The weakening of the U.S. dollar during 2017, along with the strengthening of emerging market currencies like the Indian rupee, raises further suspicion that the global stock rally may be about nothing more than excess liquidity. Investors starved of yield have been happy to bid up stocks in countries like India and China.
The major risk facing the present bull market, of course, is the prospect of a quicker end to the accommodative monetary policy adopted by the U.S. Federal Reserve. After all, the dovish monetary policy since the global financial crisis of 2008 has clearly played a major part in fuelling the second-longest bull run in U.S. market history. With the return of higher economic growth in the U.S., inflation is bound to spike up and force the next Fed chair to raise rates at a faster pace. Apart from deflating the rally in domestic U.S. stocks, this is also likely to improve the yield on American assets and cause capital to flow out of emerging markets. In addition, any repatriation of dollars by U.S. corporations, which are incentivised by the new corporate tax policy, is likely to exert pressure on non-dollar currencies. Meanwhile, the price of gold — a safe haven asset — rallied 14% last year, which is the metal’s best performance since 2010. This suggests that investors in at least some corners of the market believe the end may be near for loose monetary policy. The ‘taper tantrum’ of 2013 had served as a timely warning to emerging markets about the fickle and disruptive nature of global capital. While predicting market trends is a fool’s errand, it seems the end to this bull market might be sooner than later.
