A wave of optimism has propelled markets off their mid-March lows. American stocks are up by around 8% since then, as financial stocks have surged by 20%; the FTSE has made similar gains and has hit a five-week high.
Meanwhile, some calm has returned to the credit markets, with the cost of insuring highgrade corporate debt falling back rapidly in Europe and America.
The Fed's support of Bear Stearns and lending directly to brokers has assuaged fears of a series of bank collapses, while UBS's massive write-off last week has been deemed a sign that banks are beginning to face up to their huge losses. Analysts now hope the worst of the credit crisis is over. US stocks' scant reaction to the news that American payrolls fell for the third month in a row in March also shows they are looking ahead to "better days", says Kopin Tan in Barron's.
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In the meantime, the US recession has barely started. Unemployment has jumped to 5.1% as payrolls posted their biggest drop for five years in March and the index of industries creating jobs continued to fall. Indebted consumers are retrenching, with confidence weaker than during the last recession amid plunging house values. With the stock of unsold houses still historically high, the housing downtrend is far from over.
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The darkening outlook portends plenty more write-offs for banks as credit card and car loans, worth a joint $2.4trn as well as commercial property loans go bad, not to mention the scope for further deterioration of mortgage assets. Corporate defaults could also rise faster than expected. So far, credit market problems have hampered the economy; now, the deteriorating economy is set to undermine credit markets, says Krishna Guha in the FT.
None of this is exactly good news for earnings, but it seems the experts who didn't see a recession coming are now already looking forward to a rapid recovery. In just about every market, relatively healthy earnings growth is being pencilled in for this year, says FAZ.net which looks a stretch, given historically high margins and a global slowdown. In America, despite the recession, earnings are expected to rise by 14% this year; as Lex puts it in the FT, "something does not add up there is plenty of room for disappointment in the coming months".
In Europe analysts are still forecasting profit growth of 7%, while Morgan Stanley reckons -16% is more realistic; in Britain, it expects -7%. "Meaningful earnings downgrades" are on the cards in the second half as the global economy slows, says its latest note. This is the main reason why the current bear-market rally, which could take the FTSE 100 up to 6,200-6,300, will "ultimately prove unsustainable".
One of the hallmarks of bear markets is "continued earnings disappointments", says InvestorsInsight's John Mauldin. Note that disappointing results from Alcoa and Advanced Micro Devices at the start of the earnings season this week dented markets on Tuesday. Still, it typically takes at least three nasty quarters to dash investors' expectations; we are just in "the early stages" and thus haven't hit bottom yet. "It could be a long summer."
