What's spooked stocks? European and US equities are down by 5%-6% since 19 October. Poor results at Swiss bank UBS and the British banking shake-up hit shares early this week. But the jitters of the past fortnight are largely due to the economic outlook.
Recent interest-rate hikes in Norway and Australia are a reminder that central bank support for economies will eventually end. Tighter money will create a headwind for equities. Perhaps a more pertinent worry is that the stimulus packages haven't sparked a self-sustaining recovery as yet. Investors are concerned that growth "will be crippled by a US consumer unwilling or unable" to spend, says Bill O' Neill of Merrill Lynch Global Wealth Management. There was much excitement about America's 3.5% annualised jump in GDP growth in the third quarter, but the cash-for-clunkers programme accounted for 1.7% of the 3.5% figure, says David Rosenberg of Gluskin Sheff. Indeed, had it not been for government stimulus, GDP "basically would have stagnated".
A sustainable recovery depends on the consumer (accounting for around 70% of GDP) coming back to life. But without stimulus from Washington, households turn stingy. Car sales fell by 35% in September after cash-for-clunkers ended, with overall spending down 0.5%. Consumer confidence has slipped again. All this is no surprise: household debt is sky-high, unemployment still rising, and personal incomes have been sliding for four months in a row, says Capital Economics. The savings rate is still 3.3%, less than half the 8% likely to be needed to make up for the dent the housing slump put in consumer wealth. No wonder consumers are concentrating on repairing their balance sheets. Bank credit has fallen for five straight months.
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Consumption is "set to weaken significantly in the fourth quarter and remain subdued thereafter", says Capital Economics. With the most important part of the US economy finally retrenching after binging for years, once-exuberant markets are vulnerable to a "growth scare", as Christopher Wood of CLSA puts it. It seems investors are beginning to get scared.
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