pic.twitter.com/YrmuVgcd9M — CNBC (@CNBC) September 20, 2018
The Dow Jones Industrial Average and the Standard and Poor (S&P) 500 both reached record market highs yesterday by the close of trading. The S&P, Dow Jones, and Nasdaq all gained between 0.8% and 1% during Thursday’s trading. For the S&P it has been a few weeks of record highs, but for the Dow Jones it’s the first record close since January.
The US markets have opened flat today, while the European markets (see below) and Asian markets all opened with gains. As trade fears begin to ease, the Nikkei (Japan) has risen 0.6% and hit an eight-month high, while the Hang Seng (Hong Kong) is up 1.3%.
The week as it happened:
On Tuesday, the markets began their ascent as China announced a much more moderate raft of trade tariffs in retaliation to the America’s huge $200 billion taxes on Chinese imports. Investors and analysts took this reduction of intensity to mean one of two things: either China was running out of steam in fighting fire with fire against the US, or it wanted to bring an end to this.
By Wednesday the FTSE 100 was near a two-week high. Initially it was expected to struggle against the stronger Pound Sterling, which was boosted by the surprise UK inflation figures from the Office for National Statistics (ONS). The ONS revealed inflation increased from 2.5% to 2.7% rather than decreasing to 2.4% as predicted. This led investors to believe that the Bank of England would opt for one last interest rate rise this year, so the Pound’s demand shot up. This demand was short-lived though, as talks between UK Prime Minister Theresa May and fellow European leaders fell apart, with May telling the EU that she could not accept their offer regarding the Irish border. The fear of a Hard Brexit or a No-deal Brexit is a big deterrent from investors backing the Pound, but a cheaper Pound is of benefit – in exchange rate terms – for European investors on London markets.
Thursday, the record-breaking day, saw investors put their money where their mouth is. There had been talk for days that the US/China trade war was beginning to show signs of tailing off, with Christopher Peel – Chief Investment Officer for Tavistock Wealth – describing China as “out of bullets”. Investor caution finally subsided, and stock prices rose.
Given China imports as lot less from the US than the US imports from China, it’s no surprise that America has more leverage in the trade dispute. This may be why China’s latest $60 billion of retaliatory tariffs were only applied at a 5-10% rate, rather than the higher 25% rate like the United States has been applying to them.
Will the bull run continue?
The US stock markets have been on the rise for the past nine years. This is an incredible bull run, but there are many analysts and experts who fear that this stock bubble is showing all the signs of the Dot Com Bubble but on a larger scale, and that a correction is overdue.
The S&P 500's price-to-sales ratio is even higher than it was during the dot-com bubble. This market is ridiculously overpriced - mean reversion is inevitable and it won't be pretty. https://t.co/sOg8Ooxhm0 @zerohedge $SPY $SPX pic.twitter.com/ZtMEdGmwMQ— Jesse Colombo (@TheBubbleBubble) September 20, 2018
The big threat to the stock market bull run is interest rates, focussing specifically on the amount of rises that have happened. The US economy is growing, and so is inflation. To combat the devaluation of the Dollar, the Federal Reserve – under both Janet Yellen and Jerome Powell – has raised the interest rate repeatedly since the start of 2017. These rates maintain purchasing power, but they make it more expensive to borrow from banks. Companies react by reining in their spending, which can slow growth and decrease earnings, and when this happens it damages stock prices.
Jerome Powell is next due to speak about the US economy on Thursday September 27 at 4:30pm Eastern time (21:30 BST) at the Rhode Island Business Leaders Day in Washington D.C.