Stock market sell-off: the end of the bull market?

Last week’s global equity sell-off has continued Monday morning, with the FTSE 100 losing 1.3 per cent since the opening bell (as of 11.30am).

Overnight Asian markets slipped into the red, with Hong Kong’s Hang Seng index falling as much as 2.7 per cent, before seeing a slight recovery. Japan’s markets have also lost ground, with the Nikkei 225 down by 2.6 per cent, while the Topix Index posted a loss of 2.2 per cent.  

After trading opened in the UK, the FTSE 100 fell straight into the red, as did other UK indices. At the time of writing the FTSE 250 was down by 1.4 per cent and the FTSE All-Share index was showing a loss of 1.3 per cent.

US markets have yet to open but last week saw their worst day of trading in over two years. The Dow Jones closed on Friday (2 February) down by 2.54 per cent, while the S&P500 slipped by 2.12 per cent and the Nasdaq Composite Index by 1.96 per cent. US markets are expected to see further sell-offs when trading opens later in the day.

On the surface, the sell-off is the result of rising bond yields in US markets due to higher inflation expectations. However, with stock markets around the world seeing a sustained bull run over the past few years and valuations becoming pricier, such a correction has long been expected.

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As Russ Mould of AJ Bell notes, we have seen ‘record-high valuations in US stocks,’ while ‘January was the best month for global merger and acquisition activity worldwide since 2000.’ Added to this, January was the best month ever for global equity fund inflows.' All this combined, he noted, means ‘a pullback is healthy and even necessary because there are some danger signs flashing.’

Mould’s thoughts are echoed by Darius McDermott, managing director at Chelsea Financial Services noted, who says: ‘The simple observation is that everyone knew markets were expensive. Valuations have been higher than long term averages for pretty much every market. With valuations becoming richer it doesn’t take much to trigger a bit of a sell-off.’

The million-dollar question, as with every market sell-off, is whether the declines will prove to be a short-term blip or the start of a more pronounced market correction, possibly triggering the start of a bear market. McDermott thinks the latter is unlikely, pointing out that fundamentals are strong. 

‘Global growth is good and likewise company earnings are good, so I think the sell-off will just prove to be a pullback – everyone had been expecting a sell-off at some point so it may continue a little while yet though.’ 

Likewise, notes Paul Donovan, global chief economist for UBS, in his daily newsletter: ‘Economics has no part to play in this.’ ‘Economically,’ he says ‘the world is doing fine – on track for trend-like growth.’

Adrian Lowcock, of AXA Wealth, the fund manager, agrees a sell-off was ‘long overdue’. He adds: ‘Investors need to keep perspective, markets don’t go up in a straight line and falls of 5 per cent to 10 per cent are not as uncommon as the last 18 months may have led some to believe.  The economic outlook is still positive. The tax reform in the US is supportive of corporate profitability and earnings are still expected to grow which supports market valuations.’ 

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