UK and US Bull Runs Can’t Last
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The bulls are out in force on both sides of the Atlantic. Britain’s FTSE 100 index has hit a new four-year high as investors shrugged off bad news from retailers Next and Kingfisher and concentrated instead on merger mania: the 1,761 deals in the UK in the year to date matches 1999’s total for the same period, says Damian Reece in The Independent. Wall Street has done well since Hurricane Katrina, with the S&P gaining 2.5% in the subsequent fortnight as investors saw a possible boost for the overall economy from the rebuilding effort.
Not for the first time, however, Wall Street is playing down the downside. As Morgan Stanley’s Stephen Roach points out, the aftermath of Katrina could prove the “tipping point” for the troubled US economy. The main worry is hugely indebted consumers; households have not been this stretched since the Great Depression.
And the trend looks likely to endure as this year’s higher energy prices, given another kick by Katrina, have increased the cost of electricity, heating and transportation. Consumption has also been propped up by a housing bubble that looks set to burst, and last week brought news of the lowest consumer confidence reading in 13 years.
Bill Fleckenstein on MSNMoney.com points out that weaker-than-expected demand at IBM and Cisco – along with lowered earnings estimates at electronics retailer Best Buy – may be signs that consumption was starting to soften even before Katrina. If the US consumer’s resilience is waning in the post-Katrina, “energy-shocked economy”, the downside risk “to the rest of the US-centric global economy can hardly be minimised”, says Roach.
Nor should we minimise the risk inherent in buying stocks. US markets swing from periods of high to low valuation in long-term upswings and downswings. The S&P’s current p/e is 20 – still well above the long-term average of 15 and a far cry from typical bear market lows of below ten, so the post-2000 bear market, which followed a huge 18-year run-up, looks far from over.
Long ups and downs aren’t unique to the US, as stockmarket historian David Schwartz notes in the FT this week. “All indexes in all countries” struggle for 15 years after drastic run-ups lasting around 15 years, he says. Markets are still suffering a hangover from a run that happens once a century; it will be “a good few years” before it’s time to invest again
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