Investors more cautious as bull run comes to an end

Analysis: "Sell in May and go away" is an old stockbroker saying. But this year, players on the stock market seem to have taken the advice a little too literally.

From its recent May 10th peak, the Dow Jones index has fallen by 4 per cent. Falls of 8 and 7 per cent have occurred in the Footsie and Iseq index respectively.

What has caused recent stock market falls and what effect will they have? All analysts agree on the cause of recent declines: traders in shares, who borrowed on low interest rates to purchase share prices, have become more nervous during the month.

Recent comments by US Federal Reserve chairman Ben Bernanke frightened traders into thinking that interest rates would rise by more than they expected.

That, together with rising oil prices, increased their fears of lower than expected economic growth, and therefore lower corporate earnings and future share prices. It also would make borrowing to fund share speculation more expensive.

Niall Dunne, Ulster Bank financial markets strategist, takes the most optimistic view. For him, nerves explain all of what's going on. "No new fundamental factors have emerged to drive prices lower - oil prices and interest rates have been rising for many months now; it's just that a tipping point has been reached, and the mentality of the market has predictably produced an over-reaction."

Traders nerves about growth prompted them to grab their profits and sell, that's all, he argues. In his view no market slump is in prospect. Rather, traders will be more sober about the chances of interest rates rising and less willing to borrow like there's no tomorrow to buy shares.

Rossa White of Davy stockbrokers blames a failure to read signs coming from bond markets about future interest rate moves for the volatility of recent weeks.

"Investors in equities had ignored what was going on in the bond market. US 10-year treasuries sold off so much that 10-year yields rose by four-fifths of a percentage point between the end of January and May 12th."

According to White, traders grasped too late that interest rates were rising and that their bets were becoming riskier. "In the space of a week, the market's expectation of whether the Federal Reserve would increase interest rates in June changed dramatically," he said. And therefore, so did share prices.

But Dermot O'Leary of Goodbody stockbrokers points north for an explanation. In Iceland, a lending spree inflated corporate profits and share prices in a way that was unsustainable, and when its central bank raised interest rates, share prices fell by 18 per cent.

Fears are spreading to other countries as investors ask how much debt lies behind market growth. "High growth is always accompanied by high risk," O'Leary says.

"Investors have been blind to this reality for some time. Risk preferences are returning to normal levels after an exceptional period of stability because of uncertainty about inflation and the impact of rising interest rates."

Ironically, one of the beneficiaries of the volatility has been the dollar. Recent weakness has been one of the issues eroding sentiment. With investors looking for defensive positions, the dollar's safe haven status has seen it stabilise its position against major European and Asian currencies.

The recent bull run is over, it seems. It was great fun, but it was just one of those things.