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A couple of weeks ago it was a happy new year all round, with the Dow pushing through 11,000 and most analysts predicting further rises. They were wrong.
Instead of rising, the index fell 2% on Friday, the biggest one-day decline since the invasion of Iraq in March 2003, and one which wiped out the gains made since the beginning of the year.
The collapse was blamed on disappointing earnings from the likes of General Electric, DuPont and IBM, says Emiliya Mychasuk in the FT, as well as on worries that there could be worse to come as more than 150 firms, including Microsoft and General Motors, deliver earnings results this week, the busiest reporting week in the US.
The problem, according to Merrill Lynch analyst Justin Post, is that valuations – and expectations – are now so high that some companies needed to deliver a “positive surprise” in order to avoid damage to their share prices. Just doing what is expected is no longer enough.
The markets recovered nicely at the beginning of this week, but that doesn’t mean they are in the clear. Why? Because it wasn’t just earnings-related jitters that were to blame for Friday’s volatility. High oil prices were another “key factor” in depressing the market, says Matthew Moore in The Daily Telegraph.
But even more pertinent has to be the fact that the market is finally confronting the truth that the US economy might not be as strong as it hoped, something that can only add to the “growing sense of gloom”. Indeed, this Friday’s GDP report is expected by economists to reveal that the US economy suffered a sharp slowdown in the fourth quarter of last year, says Allister Heath in The Business – to an annualised growth rate of 2.8%, “significantly less” than the 4.1% seen in the third quarter.
The behaviour of the markets is all part of a pattern investors have seen before, says Barclays Stockbrokers. Equities often carry through the momentum of the previous year in the early weeks of the new year, before “finally confronting” the challenges that lie ahead.
This year has a different, and perhaps increased, set of problems to confront. Alan Greenspan is about to retire, the economy looks ropey, the market isn’t cheap and oil and geopolitical risk are adding huge uncertainty to the mix. Prepare for a volatile year.
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Annunziata Rees-Mogg
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