The stock market rally is just another bubble – and it's set to pop

Moneyweek
John Stepek

Stock markets continue to expect the best of all worlds.

There will be a V-shaped recovery. Everything is headed back to normal. At least, that's what you'd believe if you just look at the way stocks have surged.

But the 'real' economy is telling a different story. And it's one that could spell a very sticky ending for the current rally...
We're in a bubble

Money printing by the Bank of England and other central banks across the world has worked. Sort of.

The free and easy money being dished out by the world's central banks is finding its way into assets, particularly financial assets such as stocks and bonds. That's great for asset prices, as the surge in stock market since March has demonstrated.

But so far, it's not having much impact on the 'real' economy. In other words, the money is being pumped into financial assets, but it's not being loaned out to businesses and individuals to fund business expansion and investment, or increased consumption. In fact, businesses and individuals are still in cutback mode, and show no real sign of coming out.

So it seems we're having a surge in financial assets that has no backing in economic reality. There's a name for that – a bubble. "Instead of getting consumer inflation from all this central bank liquidity, we are seeing asset price inflation and we all know that usually does not end well for investors," Steven Ricchiuto of Mizuho Securities told the Financial Times this weekend.
What this means for property

It's interesting to look at the property market with this in mind. On the one hand, the property market benefits at the very top from the renewed boom in asset prices. You get bankers getting all excitable again, and foreign investors and people with cash looking for returns and getting fed up with the "dull" sub-5% or less return they're getting on their savings. So top-end homes in the South particularly look attractive again.

But as the latest Rightmove survey points out, at the bottom end, things are a lot tougher. "This recession appears to have hit prices harder in the North, and this is compounded by lenders' more conservative attitude to risk. Lenders quite naturally prefer to lend to lower-risk borrowers in better locations, with better job security, larger deposits and more resilient property values," says Rightmove's Miles Shipside.

In other words, there's plenty of demand for now for high-end homes that can be bought with cash or big chunky deposits. For sellers who depend on buyers who actually need home loans, the outlook is far less upbeat.