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I reckon this is the biggest single threat to global stock markets today

There’s a lot of stuff menacing share prices at the moment. In the UK, Brexit is to the fore. The EU has its share of troubles too, including populist rule in Italy and a potential recession in Germany. The US-China trade war is high on everybody’s list of worries. However, I suspect the biggest menace of all is the US Federal Reserve.

Age-old worry

You may have heard the old investment saying: ‘Bull markets don’t die of old age, but rather they’re killed by the Fed.’ This is looking like the case once again.

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This is not to underestimate the threat posed by the tariffs and retaliatory tariffs lined up by presidents Donald Trump and Xi Jinping, but I believe Trump will want to sue for peace at some point, before it all goes too far.

The impact on markets is taking the shine off Wall Street, which is painful for a president who judges his success by share price performance. If Trump can show the country he has secured better trade terms with China, he could quickly proclaim victory and move on. The next US presidential election comes next year, on 3 November 2020, and Trump will want markets flying well before then.

Mocking Jay

He cannot control the Fed, though, even under his own appointment of chair Jay Powell. Trump has publicly said that the pace of rate hikes – four last year – is hurting the economy and the Fed is “way off-base with what they’re doing.”

He may have said that “so far, I’m not even a little bit happy with my selection of Jay,” but seems to be stuck with his appointee. We all make mistakes, though.

Markets rallied this week after Powell appeared to suggest he would go easier on rate hikes, but the joy may have been premature. On Thursday, he said the Fed still plans to make the central bank balance sheet “substantially smaller” over time. Monetary policy could therefore get tighter, and stock markets could feel the squeeze.

Difficult money

Easy money in the shape of low interest rates and quantitative easing has driven stock market growth over the last decade, not to mention bonds and property as well. If Powell is pulling back, we could all feel the pain.

Powell and predecessor Janet Yellen have now shrunk the Fed’s balance sheet by 10%, or $460bn, by declining to reinvest full $50bn of bond holdings that mature every month. Russ Mould, investment director at AJ Bell, reckons this could hit $600bn this year, reducing assets to July 2013 levels of $3.5trn.

Money too tight to mention

The European Central bank stopped adding to QE in December, adding to the squeeze. Mould reckons those nervously eyeing interest rate hikes are looking in the wrong place. “It may be quantitative tightening in the US, and the absence of further QE in the EU and UK, that really sets the tone for stocks.”

It sounds plausible and corporate earnings will need to be strong and take up the slack. Right now, they don’t look strong enough. So forget Brexit, forget Trump. Tight money could be 2019’s biggest hidden danger.

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harveyj has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.