Global equity markets remain under extreme pressure amidst a perfect storm of collapsing global economic indicators. The news is pretty grim and will likely be for awhile, but remember that “it’s darkest before dawn”, which suggests things will improve in time. We agree, particularly given the coordinated efforts of governments, business leaders and consumers.
A deceleration in western economic growth to a mere 0.2% in the second quarter and fears of debt crisis contagion across the Eurozone has rattled confidence. The Head of the International Monetary Fund (IMF) also warned on the risks posed by an inadequately capitalised European banking sector. This added to the prevailing gloom. The European Central Bank (ECB) decided to support Italian and Spanish government bond markets, but only in return for an acceleration in local austerity programmes.
In the US, Mr. Bernanke delivered a speech Sept 8th stating; “The Federal Reserve will do all it can to help restore high rates of growth and employment in a context of price stability”. He went on to warn that overzealous belt-tightening by the U.S. government in the near term could also slow down the “erratic” recovery, but dashed any hopes of immediate assistance to boost the flagging US economy.
We see the ‘de-risking’ process playing out as stock and bond prices adjust to a very low and slowing global growth scenario in the developed world, if not a recession.
Currency volatility also reflects the changing environment as countries jostle for a competitive edge. The euro dropped like a stone after the ECB left its benchmark rate unchanged at 1.5% and lowered its 2011 Eurozone Growth Domestic Product (GDP) forecast.
Looking ahead through September and October all eyes will be on the economic data announcements as investors seek further confirmation of continued deceleration or stability. Ultimately an enduring and credible resolution to the European and US debt crisis is necessary if we are to see the markets move higher and this will unfortunately take time.
There are however a number of good news indicators that include:
- Stocks are relatively cheap. The S&P 500 is trading at only 11.2 times 2012 earnings.
- Falling oil prices are their own “stimulus package” to global consumers.
- The dividend yield of the market is above long term interest rates — which is also a bullish sign for stocks.
- U.S. corporate profits are very strong. Almost 75% of companies beat analysts’ second-quarter estimates.
Recall the words of Sir John Templeton: “Bull markets are born in pessimism, grow on scepticism, mature on optimism and die on euphoria.” If anything, we’re at the ‘pessimism’ phase of this cycle and not ‘euphoria’.