Hamish McRae: Three signs that markets are heading for a fall

Spot the link between three things that happened last week. Jerome Powell was named the next chairman of the Federal Reserve Board. Apple launched the iPhone X. And the Bank of England announced the first rise in interest rates for a decade.

The link runs like this. Governor Powell will be the head of the Fed who has to cope with the next global downturn.

We don’t know the timing of that, nor do we know how serious it will be. But the present US expansion is already the second longest since the Second World War and the US economy is close to full capacity. If history is any guide at all, there is an overwhelming probability that the downturn — let’s not predict a recession — will come in the next four years.

Now Apple. The launch of the iPhone X looks like being one of its most successful ever. The share price of the company shot up 2.6% on Friday, valuing the company at $891 billion (£681 billion), an increase of more than 50% over the past 12 months. It is quite plausible that Apple, already the world’s most valuable company, will become the first ever one to be worth $1000 billion — ie, the world’s first trillion-dollar company.

Look at what has happened to the share price of the other high-tech giants that dominate the S&P 500 and they are all up massively too: Alphabet (Google’s holding company) is worth $723 billion and 35% higher over 12 months; Amazon, worth $535 billion has risen 47%; and Facebook, worth $522 billion is up 48%.

These are all astounding businesses which, in one way or another, dominate the daily life of about one-third of the world’s population — actually if you add in the Chinese social networks that have copied Facebook, indirectly nearer half. But ask yourself this question: are these valuations not only a judgment of corporate excellence, but also the result of the way central banks have sprayed the world with money?

And the Bank of England rise? In global terms it may not be that significant, though the UK is still the fifth-largest economy in the world. But it is part of a pattern. At last the central banks are realising that the costs of their ultra-easy money policies have become greater than the benefits, and have started to man up and get rates back to some sort of normality. They are, naturally enough, terrified that by tightening too fast they will trigger the next recession, but they are flying blind. Rates have never been so low in recorded history, so there are no maps to guide them.

So these three events last week are all part of the same story: what happens next to the economic cycle?

I have not seen much comprehensive analysis of that, but a couple of research papers in the past few days have sought to answer the narrower question as to what will happen next to global equity prices.

One was by Charles Dumas at TS Lombard. He asked this question: “With the S&P at 2580, which is more likely over the next 12 months: 3000 or 2160?”