It would take the bravest of hearts to keep buying stocks at current valuations, says ALEX BRUMMER

Nvidia’s share price drop is a major sign of hope for the stock markets.

The £213bn loss in value in one day is huge, but it must also be seen in the context of a 120% increase over the past year, when artificial intelligence (AI) became the most discussed topic in finance.

The pullback illustrates how excessive exuberance in equity markets, driven in part by a herd instinct, can vastly inflate valuations.

Over the long term, as Barclays’ study of government bonds conducted over more than a century shows, stocks outperform bonds.

This has become even more true in recent crisis-laden years due to increased volatility in government bond markets, considered the safest havens of all.

The strength of the stock markets should not come as a big surprise.

A combination of the 2008 financial crisis, Covid and the worsening Russian war in Ukraine saw trillions of dollars of public money pour into economies, pushing debt levels in most Western democracies to 100% of national output.

Some of the money has gone directly into the pockets of taxpayers.

Donald Trump and Joe Biden sent checks to all Americans with a Social Security number.

In the UK there have been more indirect subsidies, such as those provided by the Conservatives to pay energy bills, but the effect of fiscal laxity and quantitative easing (central banks buying bonds to create cash) has created a wall of money that has found its way into the stock markets.

The US, with its technological superiority and higher productivity, has been a big beneficiary, with the “Magnificent Seven” tech companies dragging down the rest of the S&P, FTSE 100 (more slowly) and other indices.

There is currently speculation that the US economy, the driving force of global prosperity, is losing steam. The business cycle tells us that there will be a slowdown in the United States. Apart from technological advances, there is not much to be optimistic about.

The geopolitical situation is dire. Iran and its allies in Yemen, Lebanon, Gaza, Sudan and elsewhere are wreaking havoc. Efforts to end the dangerous war in the heart of Europe are virtually non-existent.

China’s rapid growth has stalled and trade barriers are rising, erasing the benefits of globalization.

New York’s top bankers are rushing in. Stock markets may be the best store of value over decades, but in the short term they can destroy savings. Who can forget the 25% drawdown in October 1987, the tech crash of 2000, etc.?

It doesn’t take a US recession to undermine values, but as Keynesian sage JK Galbraith noted, one needs to be on the lookout for the “bubble effect” – the speculative behaviour that builds up before a crisis.

The cult of shares has waned considerably in the UK, but the success of platforms such as Hargreaves Lansdown, AJ Bell and others has provided an avenue into shares via funds.

They have a vested interest in promoting markets. The rise of meme stocks, “commission-free” brokerage sites and other gimmicks has attracted a whole class of new investors to the U.S. stock markets. There is a belief that stocks have a duty to go up and never go down.

Lower interest rates could protect stock investors from large losses.

But the US Federal Reserve, the Bank of England and others have kept borrowing costs too high for too long and small quarter-point rate cuts will not be enough to prevent soft landings from becoming more difficult.

Only the bravest of hearts, looking at many stock valuations, will continue to buy.

Half full

After tough conversations about fiscal and social black holes, Rachel Reeves is finally discovering an inner desire for growth.

He has listened to entrepreneurs and venture capitalists in extending for another decade the Enterprise Investment Scheme and Venture Capital Trust arrangements, which have generated £41bn of investment over 30 years.

Both offer incentives to invest through income and capital gains tax exemptions.

It would be a shame if entrepreneurs outside the social circle were penalized by equalizing taxes on capital gains and income.