Hi everyone, I thought it timely to bring you my latest thoughts regarding where we are in investment terms, concerning the downturn which continues to grip western economies so powerfully.
There is much debate about whether we are in a bear market rally at the moment or whether we have hit the bottom and are now on our way up again. Evidence can be found for both views and it is useful to note that there is no obvious consensus on this position at the moment.
Those with defensive portfolios will be hoping we are in a spike and those holding cyclical stocks and banks are hoping this is a more sustained rally.
So, what is the evidence for each argument?
From an optimists perspective certain economic data can point to things getting better relatively rather than absolutely. Despite the Bank of England’s caution, it seems that the effect on corporate earnings has not been as bad as forecast and that the increase in unemployment is slowing.
Globally there are more positive data points, especially the Purchasing Managers Indices (PMIs) in both manufacturing and services.
I would also highlight the following areas: the UK PMI figures; the BRIC PMIs (now above 50 collectively); German manufacturing orders, and to top it all, US weekly job claims are now dropping.
The stress testing of banks in the US has been completed without markets finding any chinks in the armour although this may be a slow burner as interbank lending, whilst picking up, is not flowing just yet.
The market in general is continuing to deleverage and the fact that a number of hedge funds have completed some of this and have in some cases stopped shorting the market has also helped. Outside of the traditional core areas the emerging markets and especially China have shown some encouraging data although the shift to a more domestic based demand will take more time even with large stimulus packages.
This evidence however is at best unpredictable – as is shown in the UK housing statistics which have fluctuated in message over the last few months with different surveys indicating opposing trends. Whilst activity has been picking up it is still well below the norm and prices are still coming down. A number of economists want to see this stabilising before they will declare more confidence in a sustained recovery.
Manufacturing inventories are always a good indication of the overall state of the economy and these are continuing to decline. Whilst there is some time lag with this indicator, these days improved communication mean that the lag is shorter. Production will only increase when orders are required which is not yet happening.
Unemployment is increasing, although the rate of increase is falling – unemployment tends to generate more unemployment due to reductions in demand so there may be some way to go before the situation improves.
The Chicago Board of Trade produce equity volatility statistics and these show the market considerably above trend at the moment. Many feel these levels of volatility need to come down before equities can move forward in a more consistent manner.
On balance, the weightier of the two arguments is probably on the negative side, particularly given the latest forecasts for GDP growth in places like the US. Some experts are arguing that the market has rallied too early, before the fundamentals are in place to back this up and that we will see some profit taking bringing the market into a lower trading range.
We can continue to compare statistics for some time but it won’t prove conclusively whether markets are now on a consistent upward trend, or whether we are in a temporary blip. Perhaps the strongest point to take from the debate is the fact that these arguments are taking place at all – this is a clear indication that the downward trend has been broken suggesting at least that there is some positive, or should I say less negative, news to interpret.
From an investment perspective, all the speculation and the uncertainty adds substantial weight to the old arguments for being invested over the longer term and that regular saving is the sensible approach in this environment rather than attempting to time markets.
Anyhow, that’s how the view looks from here!
