Is the bull market in shares over?

UK share-market is down 10.19% from its high on 27 April of this year

Is the bull market in shares over?

On the subject of markets, as the Aussie cricket team bats in the last test of the Ashes at the Oval, let's remember what the great Antipodean band Crowded House told us: "Hey now. Hey now. Don't dream it's over".

But is it? Is the bull market in shares over?

The UK share-market is down 10.19% from its high on 27 April of this year. That means it's 'officially' in a correction. But 'official' corrections are largely useless bits of media-generated information when it comes to making your investment decisions. I'll explain what I mean in a moment. But have a look at the chart first.

FTSE index chart

Is the bull market in shares over?


It's not a Rorschach blot. But tell me what you see in the chart. A bull? A bear? Some squiggly lines?

What I see is an index that's gone up 80% since the lows of March 2009. That's the kind of performance that supports the argument that you should buy 'stocks for the long run'. And in a bull market like that, you can forget stock selection. To profit from an asset class in a bull market all you have to do is buy an index fund that tracks that asset class. A FTSE tracker would do the trick.

But six years is not 'the long run', especially when it's six years of stock prices supported by low interest rates. That's what makes today's market so intriguing – and dangerous. Interest rates will rise again. For the first time in six years, the narrative that you can safely buy stocks because central banks will keep interest rates low is in doubt.

China watered the seed of that doubt with its currency devaluation last week. And now that doubt is blossoming into rich red corrections in stockmarkets across the globe. Should you hold your nerve and buy or panic now and avoid the rush? Hold that thought and look at one more chart.

The great deflationary wave

Light crude oil price chart

Is the bull market in shares over?


You can't talk about the equity market without acknowledging the jaw-dropping collapse in oil prices. This drop would normally create a huge tail-wind for the economy, delivering lower energy costs to factories and households. And if high oil prices are a 'tax' on consumer spending, why aren't lower oil prices a 'tax refund' supporting spending and thus GDP growth?

Further, if you're a contrarian, how could you possibly look at the oil chart and not want to dip your toe in the water and buy?

It gets back to what I mentioned yesterday. Despite six years of quantitative easing (QE) in most of the world's major economies, global GDP growth (and oil demand growth) is weak (or 'below-trend' as the experts say). The spot price of West Texas Intermediate Light Sweet Crude is back down to 2009 levels.

Do you remember what the big fear was then? I do. Global deflationary depression.

Is that fear back? Or is that just lazy thinking, where you compare something new to something old because it's the only thing you can compare it to?

If the collapsing oil price isn't a sign of deflation – and of the failure of mainstream monetary policy – then nothing is. What you have to decide now is if the savage crash in commodity prices is confined to emerging markets and commodities, or if it's a deflationary storm on the way to the stockmarket and the bond market.

I'll come back to that tomorrow. But today, I should point out that while the financial world wrings its hands in self-conscious anxiety, there actually is a real economy out there (some of it not sensitive to interest rates at all), which is busy trying to make the future a better place with technology.

This came up in a conversation I had over lunch yesterday with Dr Mike Tubbs. Over steak (for me) and haddock (for him) we discussed some of the incredible developments in medicine and technology made by the companies he's researching on a regular basis. The point that all leads to his hard to argue with: the world is on the verge of some nearly unimaginable changes in technology that will make your life better.

His enthusiasm was infectious. It was only my lunch meeting today with Tim Price that kept me grounded. I've been working with Tim on a new project. And if you're familiar with his work – especially his 'Austrian' understanding of economics – you'll know his take on current events is a lot less enthusiastic, at least about our immediate financial future.

That's what makes a market thought, isn't it? Different conclusions reached by thinking people with access to the same group of facts. They weigh and value those facts differently. And then they act.

Part of what we're trying to do with Capital and Conflict is present you with the facts, and the different interpretations of those facts, and then offer some conclusions. A warning though: you're going to have to think for yourself. Not all of the analysts here agree.

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