How long can the global stock market party go on for?

This article is more than 12 months old

Strong economic numbers coming out of China and the US, but things can go south quickly

After a strong start to global markets this year, the question on everyone's mind is how long will the party last.

In the coming week, attention will turn to the US consumer price index inflation, retail sales, the monthly budget statement and import prices, said Bank of America Merrill Lynch.

Asia data releases include Taiwan exports, China producer and consumer price indices, Singapore retail sales, and China exports.

Based on economic data this year, there is little reason to expect a slowdown yet. Strong numbers are coming out of the two largest economies in the world: China and the US.

China's services sector expanded last month at its fastest pace in more than three years, based on the Caixin/Markit services purchasing managers' index (PMI), a private sector survey. A survey for the manufacturing sector showed similar healthy growth.

In the US, the latest report on Friday last week seemed to be business as usual. After its publication, the S&P 500 continued to push upwards to new highs.

The jobs report showed the economy adding 148,000 jobs last month, which was somewhat below expectations, but counterbalanced by other indicators showing a strong economy.

As French bank Societe Generale noted, the unemployment rate held steady at a cycle low of 4.1 per cent, the work week was flat at 34.5 hours, the highest in two years, and the prime-age employment-to-population ratio inched up to 79.1 per cent, its highest since July 2008 and less than a percentage point from its 2007 average of 79.9 per cent.

"In short, the labour market remained tight," Societe Generale said.

Meanwhile, worker wages are in a "not too hot, not too cold" phase, rising at 2.5 per cent year on year in the latest report.

The number masked higher increases in low-paying jobs such as those in the security, clothing and food services industries.

What can go wrong?

One easy answer is that the Fed may tighten too quickly.

Already, markets are predicting an 82 per cent chance of a March rate hike.

By the middle of the year, it may well be that the upper bound of overnight rates will be at 2 per cent, from around 1.5 per cent today.

Higher rates have ramifications on borrowing costs, notably mortgage costs.

Eventually, life will get more difficult for workers who have to pay their housing bills as well as higher healthcare and education costs. They will spend less, and this is when things start slowing down.

Nobody knows when that will be, though.

Because of an extraordinarily slow recovery after the global financial crisis 10 years ago, analysts have been arguing that this business cycle will be longer than usual.

And as financial assets go higher and higher, more reasons are circulating to explain their rise.

Today, it has become fashionable to say that stock markets do not fall simply because they are overvalued.

Market psychology is in play. Higher prices, as investor Sir John Templeton once said, are caused by higher prices.

Yet one should be aware that the obverse is also true.

When the trend reverses, there is no particular reason why markets can go lower, even if they look cheap. Lower prices will cause still-lower prices.

Sometimes, it pays to be a little bit contrarian. It is when nobody can see any reasons that will bring markets down - like now - that one should get a little bit worried.

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