THIS SEVEN-YEAR-OLD BULL MARKET MAY STILL HAVE ROOM TO RUN.

Monetary ‘ bazookas’ losing effectiveness

The U. S. bull market celebrates s even years this month, but economists say that increased volatility and the decreasing effectiveness of monetary “bazookas” to rally risk assets suggest the bull is running out of steam.

Nonetheless, the S&P 500 has managed to rally since the post-financial crisis lows of March 2009, even as a European debt crisis, a fiscal deadlock in Washington and a crash in oil prices have all threatened to end the bull market over the years.

Global stocks fell into a bear market last month, but the S& P 500 narrowly avoided doing the same and has since rallied from the February lows. That means the bull market is now 84 months long, the third-longest in history and closing in on becoming the second longest, a record currently held by the 86 months of gains seen between June 1949 to August 1956.

Much of the current rally has been helped along by accommodative monetary policy from the U. S. Federal Reserve and easing policies in general around the world. But the punch that such policies once had appears to be waning.

“The near- perverse market response to recent bazooka- like easing steps, by first the Bank of Japan and its negative rates and then the ECB this week, suggests that we have almost reached the end of the line for central banks supporting asset prices and/or undercutting currencies,” said Douglas Porter, chief economist at BMO Capital Markets.

Still, that does not necessarily mean that the end is right around the corner.

The record for the longest bull market is held by the 113- month rally seen from October 1990 to March 2000, a bull that BMO Capital Markets’ senior economist Robert Kavcic says has many parallels with the current environment.

Kavcic points out that in 1997, when that bull market was where the current one is today, the Fed had just hiked interest rates by 25 basis points — as it did at its December meeting last year. But a sudden downturn in the global economy, exacerbated by the shock of the Asian financial crisis, forced the Fed to backtrack on its policy.

Kavcic said that any similar shift in policy this year could extend the market rally to rival the one of the 1990s.

“Global headwinds were also blowing through 1997, causing the Federal Reserve to lay off its tightening cycle through the latter stages of the year (it raised rates once in March ’ 97), before eventually cutting rates 75 basis points in 1998,” Kavcic wrote in a note to clients.

Economists had earlier this year speculated whether the Fed would be forced to halt rate hikes or even cut again after a wave of selling hit global financial markets in January and February, accompanied by a 40- per- cent crash in oil prices. Chairwoman Janet Yellen noted that “financial volatility” had become a concern for the open market financial committee during a meeting in January.

But with markets rebounding, economists again are expecting the Fed will continue to hike rates this year. Holding off on rate hikes risks overheating the economy, as the U. S. labour market sits at a level the central bank considers full employment and inflation has recently begun to pick up.

Kavcic also notes that the risks of halting hikes or even cutting, such as what happened in 1998, would risk throwing risk assets into the kind of bubble that put an end to the 1990s bull.

“Some will argue that, by 1997, the bull market would have rolled over if the Federal Reserve didn’t back away from tightening,” he said. “That shift, along with solid domestic economic fundamentals in the U. S., arguably helped fuel the final run- up in valuations through early 2000, which ultimately ended badly as monetary policy had to aggressively catch up. We might be at an equally-important stage of the cycle today.”

The Fed’s next policy meeting will be held from March 15-16, and markets are currently pricing in an almost zero per cent chance that the central bank will hike rates. June’s meeting is seen as the most likely to see a hike, though analysts will be watching this week to see whether such a move will be telegraphed in the Fed’s wording.

THE END OF THE LINE FOR BANKS SUPPORTING ASSET PRICES.