The tumult in markets: stocks are in a ‘superbubble’

“It’s been an ugly start to the year” on the US stock market, said Michael P. Regan on Bloomberg – and “many on Wall Street are bracing for it to get even uglier”. By midweek, the S&P 500 had dropped 10% since the start of the year, and the tech-heavy Nasdaq by 15% – but “market pundits seemed more shaken than those numbers alone would suggest”, with talk of “long winters and bursting bubbles”. There’s a sense that for the first time in ages, the markets are “going to have to grit out losses without help from an accommodating US Federal Reserve”. The strong balance sheets of many companies “could eventually help put a floor under equity losses”, but “the long-reigning expectation that risky assets will mostly go up” has been broken. This sell-off may prove “the ultimate test of what’s real and what’s not”.

The background to the nervousness was this week’s US Fed policy meeting, said DealBook in The New York Times. While few pundits expected the Fed to raise interest rates this week to tackle galloping US inflation (currently at a 40-year high of 7%), no one doubts it is chairman Jay Powell’s “main concern”. Most market observers predict the first rise will come in March. After that, wrote Goldman Sachs economist David Mericle, in a note to clients, the Fed may look to tighten “at every meeting until the inflation picture changes”. Some economists were also expecting Powell to signal “an aggressive contraction” of the Fed’s balance sheet, said The Economist – a “quantitative tightening” of the assets that were purchased to smooth the economy at the height of pandemic. Traders haven’t been waiting around to find out. The sell-off of stocks and bonds in recent weeks is a sign of their sense “that a hawk is circling overhead”.

It’s notable that US markets, caught up in their own woes, seem to be ignoring “the now very real prospect of war in Europe”, said Jeremy Warner in The Sunday Telegraph. Perhaps they see no point in reacting until the catastrophe “actually happens” – which it may not, given that Vladimir Putin has got the West “over a barrel, quite literally” over exports of oil and gas. The prospect of a war in Ukraine was certainly “in the mix” of this week’s sell-off in Europe, said Nils Pratley in The Guardian: but it was warnings from the US that really got traders going. “Let the Wild Rumpus Begin” was how Jeremy Grantham, the British co-founder of the Boston-based fund manager GMO, started his commentary, warning that stocks are in a “superbubble”, and that we’re about to hit the “vampire phase” of the bull market. Grantham called the dot-com and 2006 crashes. Once again, “he may have got his timing spot on”.

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