In the financial markets, the story of the month has been the turbulence of the US equity market, which to some observers marks the end of an almost decade-long bull run dating back to the global financial crisis. From its low on March 9, 2009 to its record high on Sept 20 this year, the benchmark S&P 500 soared more than fourfold. But between then and Christmas, it dropped almost 20 per cent with most of the correction happening this month, before rallying about 5 per cent on Boxing Day and then yoyo-ing again on Thursday. The nine-year market rally can be explained, first, by a prolonged period of ultra-low interest rates; the Fed funds rate remained below 1 per cent from December 2008 to June last year.
The rally was also helped by the US economic recovery from the financial crisis, which, albeit slow at first, gathered pace and remains sustained even today. However, besides the inevitability that it would take a breather after a marathon bull run, there are good reasons for the market's pullback over the last quarter. First, interest rates are on a rising trajectory. The US Federal Reserve has hiked rates four times this year and indicated it would do so twice next year. Second, the US economy is expected to slow down. The International Monetary Fund projects it will grow by 2.5 per cent next year, compared with 2.8 per cent this year. Third, there are major uncertainties weighing on the global economic outlook, including continued trade tensions, especially between Washington and Beijing, an economic slowdown in China, and Britain's impending exit from the European Union in March, which will have a negative economic impact on not only the UK, but also the EU. But for all the gloom and uncertainty, and barring unexpected shocks, it is not clear that a bear market is imminent. The US economy, while slowing, remains strong, with unemployment at close to a 40-year low. Retail sales over the holiday period have been robust. Monetary policy, while tightening, is still accommodative and will remain so - even after the two anticipated rate hikes by the Fed next year, the nominal short-term interest rate will be 3 per cent, implying a real rate of just 1 per cent.