This year's bull market turned out to be a bunny

Whatever happened to the Great Crash of 2016? The year began with the worst few weeks ever across the entire financial system – oil plunging below US$30 per barrel (briefly), commodities crashing, the Chinese economy slowing dramatically, panic spreading across the emerging markets causing chaos in Brazil, Russia and South Africa, and Wall Street, London and all the big stock exchanges recording massive losses.

While most of us felt we had not yet recovered from the 2008-09 recession, the gloomsters were forecasting another one was on the way – except this one was going to be a real whopper, plunging the world into conditions even worse than the 1930s. A highly leveraged international financial system, over-borrowed consumers, and banks that had not yet rebuilt their balance sheets spelt disaster.

Volatility, the market’s barometer of confidence in the markets, hit new highs in the first few weeks of January. The Chicago Board Options Exchange Volatility Index, known as the “fear gauge”, was up 13 per cent and hit an all-time peak of 28 in February (the long-term average is 20); the Nikkei Stock Average Volatility Index, which measures the cost of protection on Japanese shares, climbed 43 per cent in just five days.


George Soros said at the time: “China has a major adjustment problem. I would say it amounts to a crisis. When I look at the financial markets there is a serious challenge that reminds me of the crisis we had in 2008.” On a panel in Washington in September 2011, he said the Greece-born European debt crunch was “more serious than the crisis of 2008″. Lots of crises there. Of course, no one enjoys a good crisis more than Mr Soros, who has made $27 billion riding them, but this time even he was getting scared.

The widespread view at that time was that the market crash was either anticipating something awful or else had the power to cause it. Falling prices would weaken confidence and frighten managements, and governments to take evasive action that could lead to another crash.

And yet two months later it does not look so bad. Oil, which hit a low of $26.03 on February 11, has bounced back by more than 60 per cent. The bears, who looked like masterminds then, now look like fools. They certainly did not see that coming. Commodities and commodity stocks have also staged amazing recoveries: Anglo American hit an all-time low of £2.15 in January and two months later topped £6 despite – or maybe because of – announcing a £5.5bn (Dh28.6bn) loss for last year. Most of the other big mining and oil stocks have also staged recoveries, albeit less spectacular than Anglo: Glencore, for instance is up from 67 pence to £1.50.

The result is that, despite that horrific start to the year, share prices look as if they will end the first quarter of 2016 higher than they started. Wall Street’s “fear gauge” dropped to 15 last week, its lowest level since mid-August – at which point China devalued its currency, sparking a period of financial turmoil.

“Capital markets are basically unwinding earlier fears of a global economic recession,” said Michael Underhill, a portfolio manager at RidgeWorth Investments.

James Paulsen, the chief investment strategist at Wells Capital Management, put it more wittily: the market behaviour of the past year, he said, can be “characterised not by a bull nor by a bear, but rather by a bunny that hops about a bit but really doesn’t go anywhere”. Bunny markets, he adds, require nimble and opportunistic behaviour by investors – as those who took advantage of the commodity price crash in January have discovered. I met someone over the Easter weekend who was happy to boast of his plunge into Anglo shares at the bottom of the market; and I don’t think he is alone.

At the macro level there is also little sign of the crash we were bracing for. The latest data, published last week, shows the US economic recovery is still intact. In Britain last week, the chancellor George Osborne downgraded his economic forecast for this year to 2.0 per cent growth (marginally worse than the 2.2 per cent I suggested in this column last week) from 2.4 per cent, but the economy is still in reasonably good shape. Europe is slowly – oh so slowly – coming out of its recession, as is Japan, and the markets have built a Chinese downturn into their global forecasts.

So all is well. Or is it? The warning signs that so panicked the markets at the beginning of the year are all out there still: there is still a glut of oil; demand for commodities will not recover until China does, and that could be some time; the fundamental weaknesses among the emerging markets have not gone away. Worst of all is the growing prospect of Donald Trump becoming US president and imposing his protectionist vision on the world: imposing tariffs on Chinese imports, ripping up trade deals and forcing companies such as Apple to bring manufacturing home to the United States.

That’s enough to make any economist quake in their boots. 

Ivan Fallon is a former business editor of The Sunday Times.

business@thenational.ae

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