Stock markets around the world have been on an extended bull run for a long time now but economists are getting increasingly worried that at least in the US it could soon be coming to an end — and with a nasty bump.
Two charts from Deutsche Bank and Bank of America Merrill Lynch this week show that shares are currently in “too good to be true” territory and if history is anything to go by they’re due for a sharp correction.
Let’s look at the first chart from Bank of America Merrill Lynch, which shows how the current run for US consumer discretionary spending companies — retail, media and leisure — compares to other historic rallies.
The chart shows the collective sector has rallied close to 350% over around 1,500 days. Only six bull runs have gone on for longer — and there should be flashing alarm bells when you see which ones they are.
The consumer rally is currently closing in on such infamous bull runs as: the Dow’s 1929 rally, also known as the Wall Street Crash; the Dow’s 2000 run, remembered as the dotcom bubble; and the Nikkei’s surge in 1987, aka the start of the Japanese asset price bubble.
If these similarities weren’t worrying enough, Bank of America also warns that the fundamentals don’t support the rally. In short, US consumers aren’t increasing discretionary spending at the same rate as shares are rising. The stocks have become untethered from reality.
The second chart, from Deutsche Bank today, shows a similarly worrying picture.
Once again, the chart shows that the current S&P 500 rally is close to a record at 917 days, compared to the average of 357.
And once again the record it’s closing in on is not enviable. The longest rally without a 10% correction for the S&P 500 run up to October 1997. That came to an end when the index dropped over 6% in a single day, hit by an economic crunch in Asia.
Deutsche Bank also warns that, as with the consumer discretionary rally, the fundamentals don’t support the run. Companies are surging despite soft macroeconomic data and lukewarm signals from the US Federal Reserve.
In short, the signs aren’t great for the US stock markets right now. And if the US bubble bursts, then the rest of the world will feel it in a big way.