A return to normality

So at last the extraordinary market conditions of the last two years – strong equity markets, dormant bond markets and record low volatility – have come to an end. The sharp sell-off in the stock market we have witnessed in the last few days is entirely healthy and long overdue. The immediate trigger was a combination of rapid price acceleration and a surge in bullish sentiment, especially amongst professional advisers, the like of which has been notably absent until now.

It is far too early to read any longer term significance into the move however – which would have been described as entirely normal in the days before QE and ultra-loose monetary policy – and none of the traditional warnings of an impending bear market are visible so far.  To say that is not to deny that we are clearly moving into the latter stages of the market cycle, with all eyes on the 10-year bond yield in the United States, the lynchpin of the global financial system.

If it breaks decisively through the 3% mark (it is currently around 2.85%) it will certainly be time to call the end of the 35-year-long bull market in bonds, as many pundits have already done (albeit prematurely).  But we are not quite there yet. The toughest thing to do over the last few years has been to remain long of risk assets; it looks like we are finally entering the last quarter of the cycle, when judgment and experience will be tested, and professionals who have coasted along in the low-volatility world, will have to earn their handsome fees. Another good thing.