Most are familiar with the impact of the law of supply and demand. Whether it be oil, iron ore, equities or bonds, these forces will ultimately determine the price. The direction in price is dictated by whichever force is in the ascendant. Should demand exceed supply, the price will usually strengthen and vice versa.

The US equity market has performed strongly since the election of Donald Trump in November 2016. Equity issuance (supply) has contracted, while the combination of an explosion in the number and size of share buybacks and robust growth in fully-invested passive funds has supported demand.

Yardeni Research, with data from Standard & Poor’s and the US Federal Reserve Board, reveals the total gross issuance of new equity minus share buybacks of non-financial S&P500 companies has fallen from a balanced position (issuance = buybacks) in 2010 to the current (2Q18) position, where annualised buybacks exceed gross issuance by around US$625bn. This is the widest negative gap in over 25 years.

So far in 2018, authorised share buybacks total almost US$800bn and are projected to reach US$1 trillion by year’s end. Investors have been attracted to equity markets by strong earnings growth, supported by January tax cuts and robust economic growth, underpinning fundamentals while monetary policy settings have been accommodative. US equity markets have made record highs on numerous occasions in 2017 and 2018, reflecting demand swamping supply.

However, from an historical viewpoint, current valuations are somewhat stretched. Despite strong market performances through 2018, fewer and fewer stocks are making new highs, the heavy lifting now shared by a dwindling cohort. The FAANGs (Facebook, Amazon, Apple, Netflix and Google—Alphabet), led by Apple and Amazon, have been heavy lifters as their respective market capitalisations pierced the US$1 trillion barrier. They have helped propel the S&P 500 and Nasdaq to record levels. In late March, the combined market capitalisation of these companies was US$3.01 trillion. At the close on 5 October, $3.42 trillion, up 13.6% or US$410bn. Facebook declined by US$18bn.

Turning to the US bond markets, there is a completely different set of circumstances. After a bull run of over 30 years, there is increasing evidence the market has peaked and supply is in the ascendancy. Bond yields are rising, prices are falling. There are normal market forces at work, including strong economic growth and a hint of inflation as the US labour market tightens, to push yields higher. After a false start when yields jumped on a rogue 2.9% surge in January’s average hourly wage rate, fund managers are now convinced the long-in-the-tooth bond bull market is over and are adjusting portfolio settings accordingly. In more normal circumstances the unwinding would be orderly.