Markets: Is the party at Bill Clinton's place over?
Investors are witnessing a rebalancing of economic growth away from the United States and back towards Japan and Europe.
Tuesday, August 17th 1999, 12:00AM
Last week people in the Northern Hemisphere witnessed the last total eclipse of the century. People have also been asking if the biggest bull run of the era is also about to come to an end?
Most of the major markets around the world have suffered falls of around 10 per cent and in the United States the technology-laden NASDAQ index has taken an even bigger hammering.
Jitters from falling market indices have been further fanned by a strong warning from the US Federal Reserve that it won't hesitate to raise interest rates again if the economy doesn't slow and inflation shows signs of accelerating.
Chairman Alan Greenspan told Congress this week that the central bank would be prepared "to act promptly and forcefully" to slow the economy and keep the bull run on track. A raise in interest rates is the equivalent of putting a block wall in front of a speeding car. His comments are particularly painful as the US sharemarket is dependent on low interest rates to sustain growth of companies across the board.
Connecticut-based researchers Bridgewater Associates have recently compared the present US bull market to previous big bulls in 1987 and in Japan in 1989. It says that the decline in US equity prices from their peak in mid-July looks like developing into a full-blown correction.
So what's happening?
There is realisation around the globe that the period of easy liquidity, and low interest rates is coming to an end. One of the early signs of this was back in July when the Federal Reserve raised short-term interest rates in the US by 25 basis points. This was the first tightening for some time, and although it was potentially bad news for investors there was some upside. The positive news being that Greenspan indicated that this was a one-off tightening, rather than the first of a series of rate increases. He also indicated that the Fed had moved from a tightening bias back to one of neutrality.
That was back then. Now, because both equity markets and bond yields have continued to rise, it's only a matter to time before interest rates are pushed up, AMP Asset Management head of investment strategy Paul Dyer says.
There's another force at work too, that is investors are witnessing a rebalancing of economic growth away from the United States and back towards Japan and Europe.
"This is part of a long term cycle that exists in global economies," New Zealand Assets Management director Alan McChesney says.
The 1980s clearly belonged to Japan and the 1990s have been the United States' most recent decade of fame.
Against a backdrop of numerous economic crises around the world in recent years (Asia, Russia, Latin America) the powerhouse United States economy has held the world together. One could say thank god US consumers have kept spending money to keep the world going. Now though, it appears the US is slowing down (or will be forced to slow down) and the baton is being passed to other economies.
Across the Pacific the Japanese economy is finally showing signs of moving out of its stagnant state and there is data showing other Asian economies are also starting to bounce back. Dyer says data from Asia shows that the recovery there is "quite advanced now". Looking east from the US, Europe still continues to offer growth prospects, and there are signs Latin America is recovering also.
McChesney warns that this rebalancing will take time to unfold and quite clearly there is still a long way to go and much still has to happen.
"With very low interest inflation and interest rates the world now has a chance to recover," he says. "As the recovery continues the imbalance between growth in the US and growth in the rest of the world will start to disappear. However, global growth has not yet reached a stage where there is enough sustainable momentum should the US economy slow significantly or US consumers stop spending. Any serious setback in the US over the next few months could still have the potential to reverse the global recovery story."
He says the biggest test facing markets now is how they manage the shift of economic growth form the US to Europe and Japan.
What should investors do?
It's also a major test for investors. While many investors consider a 10 per cent drop merely a correction, and therefore a golden opportunity to buy in to the market again, others are warning that the market was over-valued and the bubble has popped bringing it back to more realistic valuation levels. On that basis, it's not so much a buying opportunity.
More conventional investment philosophy says that it's time in the market, not timing the market which is the strategy which will produce good returns for investors.
Dyer warns that timing the market is a dangerous practice for private investors.
"It's very dangerous for private investors to try timing the market too aggressively," he says. "Even professional managers have trouble doing that systematically."
Merrill Lynch vice president Peter Fredricson warns against investors making wholesale changes to their portfolios on the back of one week's volatility. Rather he says recent developments are a reminder that investors need to think carefully about their investment goals and risk tolerance.
Merrill Lynch, which essentially puts its clients into direct investments and United Kingdom-domiciled listed investment trusts, has been underweight in the US market for "quite a while".
"In the past six months we have been in markets such as Europe and Japan," he said.
"In the last week or so we have come to the view that maybe the Fed will do something," Fredricson says. "Does that mean we are getting out of the market...absolutely not."
With regards to US investments Merrill Lynch is changing its focus away from the big cap stocks which have driven the market to smaller ones, plus it is now starting to favour a value investing philosophy over a growth orientated one.
Fredricson's other piece of advice is that people have to be careful they don't perpetuate some form of self-fulfilling prophesy, such as: "The market's going to crash, let's get out".
Dyer also warns that there will be quite a bit more volatility in the short term. The defining moments on the near horizon are the Reserve Bank's monetary policy statement next week and the Federal Reserve's open market committee meeting on August 24 which is where the next decision on short term US interest rates will be made.
"In the meantime markets will be oscillating around waiting for the next move," he says.
This article first appeared in the Business Hearld.
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