Is this the death of the bull market?

@ @ @ @@page The bull market that has seen shares rise in value by a third over the last two years is finished, according to leading equity strategists and economists, say Edward Simpkins and Robert Watts in The Sunday Telegraph. Last week saw the largest one-day fall in the FTSE 100 for more than three years as world markets were hurt by the falling value of the dollar – which hit its lowest level for a year against the pound and the euro. This worried investors, as it implied inflation – and high interest rates could well follow.

The dollar led the Dow to suffer its worst fall in five months, which dominoed around the world markets, including the FTSE’s slide of 2.15% in one day on Friday. Tokyo and Hong Kong also suffered, before the European markets followed suit. The emerging markets led the sell offs "as investors recoil from risky assets, pummelling stocks and bonds in Turkey, Hungary, Iceland and much of Latin America", says Ambrose Evans-Pritchard in The Daily Telegraph. Indeed, before the markets crashed, the Chicago Board Options Exchange’s Volatility Index (VIX) – otherwise known as the ‘fear gauge’ – showed an "abnormally low level of anxiety amongst investors", says The Economist. But that is a "warning sign".Low volatility is the calm before the storm. That means we are heading for a "riskier phase of economic growth". Nabokov put it best, says The Economist. "Complacency is a state of mind that exists only in retrospective: it has to be shattered before being ascertained." It seem the VIX was proved right almost immediately.

And the shattering could come soon. Stockmarkets in the middle of 2006 are "confronting a tight Federal Reserve and European Central Bank, sharply higher bond yields and a downswing in potential profits", says a report by Lombard Street Research. That has raised the risk of "an impending financial crisis" in reaction to the recent excess of easy money and leverage available, thanks to low interest rates. Those are now on the rise, cutting off the supply of cheap money that has been keeping growth alive.

Ominously, bonds are "no longer viewed as a safe haven", says Evans-Pritchard, which is a sign that inflation is gaining a foothold in the major economies. "The crash of 1987 started with a massive dollar and bond decline in the spring," according to Volkmar Hable, chairman of Samarium Technology, in The Daily Telegraph. Indeed, says Teun Draaisma, the head of European equity strategy at Morgan Stanley. "We are in for a very troubled summer," he warns.

Inflation may be rearing its head again, but that is less worrying than the other option – stagflation. Stagflation is inflation coupled with low growth.This could be a "less innocent explanation" of what has happened in the markets, says John Authers in the FT. Indeed, the world’s largest economy – the US – does not look to be in rude health. The threat of higher inflation pushed yields on US treasuries to their highest since May 2002 (which is likely to cause a housing and spending slowdown as borrowing costs rise) and US consumer sentiment is at its lowest since October 2005 (that may not sound dramatic, but remember that September and October saw the aftermath of hurricanes Katrina and Rita, points out John Stepek in MoneyWeek’s MoneyMorning.com). Bar those two months, US consumers "are now the most pessimistic they’ve been since 1993".

And the fact remains that there are "some unsettling global factors causing concern", says Joanne Wallen on Citywire.co.uk. For the private investor, anyone with a short-term view should at the very least be asking themselves whether they are sitting on some healthy profits, "and whether they might just want to realise some of their gains".