The US stock market has been inflating continuously since Black Monday in October 1987 when the new Fed Chairman, Alan Greenspan, panicked and opened up the financial sluice gates.
Between 1987 and 2015’s May peak, the S&P 500 had risen by nearly 1000%. This had nothing to do with the real economy. Real median household income in 1989 was $53,000 in constant 2013 dollars, exactly where it is today.
Now the tide is receding. The global commodity crash and collapse in capital expenditure driven by the corporate focus on stock buy-backs will be driving corporate profits down increasingly over the coming year
Central banks are in trouble. In the emerging markets banks they have to shrink their money supply in order to prevent massive capital flight, like the $800 billion outflow from China in the past 5 quarters.
Developed market Central Banks have held interest rates at the zero level for seven years and gobbled up much of the public debt via quantitative easing. But while drastically inflating financial asset prices, this hasn’t helped the real economy. Central bank credibility is evaporating quickly, with confusion, indecision and incoherence in policy becoming more apparent.
This loss of confidence in the Central Banks and the belief that they can always stand by the stock markets, will cause valuation multiples to contract. At the same time, the accelerating global commodity crash, the collapse in capital expenditure and declining trade will soon bring on worldwide recession——one which the central banks will be powerless to reverse via monetary stimulus.
Stock prices will be under pressure from lower multiples and lower earnings for a considerable time. It is likely that we are in for an unravelling of the rises of the last 20 years.