After rallying strongly over the previous few weeks, stock markets finally took a tumble last week amid signs that some investors are seeing low prospective returns from equities going forward.
The Standard & Poor's 500 Index fell 1.1 percent last week, the most in more than a month. The STOXX Europe 600 Index fell 1.7 percent, its first loss after four consecutive weekly gains. The MSCI Asia Pacific Index fell 2.7 percent, its biggest weekly decline since the week ended 13 July 2012.
The biggest losses occurred on Thursday.
Japan's Nikkei 225 kicked off the world-wide decline that day by plunging 7.3 percent, the most since the aftermath of the March 2011 earthquake and tsunami. The fall was mostly attributed to rising government bond yields. The Bank of Japan responded by injecting 2 trillion yen into the financial system.
Other markets also declined on Thursday. Elsewhere in Asia, the Hang Seng fell 2.5 percent. The STOXX Europe 600 lost 2.1 percent. The S&P 500 fell as much as 1.2 percent during its trading session but managed to recover to end just 0.3 percent lower for the day.
Earlier in the week, the S&P 500 had hit an all-time high of 1669.16 on Tuesday.
Indeed, the falls last week had ironically occurred just days after Goldman Sachs equity strategist David Kostin raised his forecast for the S&P 500 after its recent record-breaking run.
In a report released on Monday, Kostin said that the US stock market would climb a further 5 percent to 1750 by the end of the year and continue to advance in the next few years to hit 2100 in 2015.
“Our positive 2013 outlook for S&P 500 has played out much faster than we expected,” he wrote.
However, others think that the strong gains already made in markets may limit future returns.
Lim Chow Kiat, group chief investment officer of the Government of Singapore Investment Corporation, said at a conference in Singapore on Tuesday that lower returns on bonds and stocks in the next 10 years are a concern for investors.
Lim said that the average annual return on bond yields will be about 1.9 percent over the next decade while equities may offer a 1.6 percent median real return a year.
Lim said that “more and more investors are being crowded into searching for yields and taking risk” and this “leaves little on the table to cushion adverse outcomes”.
Lim's stance is similar to John Hussman of Hussman Funds.
In an article on Monday, Hussman described current market conditions as “overvalued, overbought, overbullish”. He estimated a prospective 10-year total annual nominal return on the S&P 500 of just 2.9 percent.
Furthermore, with bond yields rising, Hussman said that conditions are now similar to several major market peaks in the past.
“In general, the initial decline from these peaks tends to occur as a sharp 6-10% market drop over a handful of weeks, typically followed by a partial recovery attempt toward the prior peak,” he said.
Now, the S&P 500 has not seen a sharp drop recently. Its fall last week was mild.
However, the Nikkei 225's loss on Thursday did fall within the range Hussman mentioned as typical following a peak, but in one day rather than over several weeks. It reflects the kind of volatility that often marks the end of a bull market.
Of course, this does not necessarily mean that Japan's stock market has peaked. Back in 2007, China's Shanghai Composite Index fell 8.8 percent on 27 February. Other markets' reaction to that fall was greater than to the recent Japanese fall, with the STOXX Europe 600 falling 3.0 percent that day and the S&P 500 falling 3.5 percent.
However, Chinese stocks recovered strongly after that. By the time it peaked in October 2007, the Shanghai Composite was double its level at the start of 27 February.
Still, some investors are clearly concerned that at current levels, prospective long-term returns from equities have diminished. This could leave stocks vulnerable to further sell-offs.
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