The markets' sweet spot sours
Feb 05, 2010
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Most markets saw in February with solid gains, but so far
2010 has been heavy going. The S&P 500 slid by 3.7% in January, its worst
month since March 2009. The FTSE 100 lost 4%. We've had the biggest correction
globally since the rally began, says John Authers in the Financial Times.
Bad news is no longer shrugged off, while good news
doesn't invariably provide a fillip. One problem is that markets had already
priced in a strong earnings and economic recovery. The S&P's cyclically
adjusted p/e, for instance, is 25% above its historic average. The fact that
surprisingly strong fourth-quarter earnings have been greeted with
profit-taking suggests that the massive rally since March "bought and paid for"
strong fourth-quarter earnings, says Michael Santoli in Barron's.
But it also seems that investors are starting to take a
closer look at supposedly good numbers. Even the unexpectedly high 5.7%
annualised rate of GDP growth in the fourth quarter couldn't give the markets a
kick last week. The problem? The inventory cycle, which tells us nothing about
the strength of underlying demand, accounted for 3.6% of the figure. And
underlying demand remains poor, says David Rosenberg of Gluskin Sheff. Domestic
demand growth actually slowed to an annual rate of 1.7% in the fourth quarter
from the summer's 2.3%, despite all the stimulus. With consumers and banks
deleveraging, don't expect a strong rebound anytime soon.
Rather than celebrate the recovery, investors are
realising that growth looks set to be sub-par for a long time, says Neal Soss
of Credit Suisse. Fear of tightening is another key theme. The market is like a
person having to "relearn a task after a major illness", says Peter Dixon of
Commerzbank. Markets will have to "learn to do without the huge amount of
support from governments and central banks", as recent jitters over China also
illustrate. Sovereign risk is a new worry for 2010.
The bottom line? In 2009, investors had it both ways,
says The Economist. Good news meant recovery, while bad news meant interest
rates would stay low and liquidity ample. This year, either the recovery will
disappoint or the stimulus will be withdrawn. The 'sweet spot' markets enjoyed
in 2009 now looks over.
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