Stocks have recovered from their summer swoon. The FTSE 100 has gained 8% in seven days, its best run in four years, while the S&P 500 is up by a similar amount and has reached its highest level since last November. Unexpectedly strong results from Goldman Sachs and JPMorgan set the tone. Intel and IBM also produced positive surprises. Early this week Goldman added to the bullish mood by saying it expected the S&P to finish the year another 15% higher.
Yet while investors may be feeling perkier, "there's still so much evidence that the bearish fundamentals are little different to a couple of weeks ago when share prices were heading lower", as Angus Campbell of Capital Spreads puts it. Strong results at Goldman Sachs and JPMorgan don't mean that the banking crisis is over , while the latest news has hardly been wholly positive. The overall macroeconomic data are still merely "getting less bad", agrees Edward Hadas on Breakingviews.com.
On the earnings front, economic bellwether General Electric, for instance, has reported a 50% drop in profits and a 17% decline in revenue for its latest quarter. There is still "a very long line-up of companies" where cost-cutting, rather than improved sales, are the key to earnings numbers, notes David Rosenberg of Gluskin Sheff. On this side of the Atlantic, Citigroup points out that the rate of decline in earnings forecast downgrades for 2009 has moderated. But according to Jeremy Batstone-Carr of Charles Stanley, forecasts for 2010 are "far too high".
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The wider problem, meanwhile, is that the West looks set for a lacklustre recovery and years of sub-par growth. This is a changed world in which consumers continue to pay off massive debt loads. A more tightly regulated financial system, along with higher taxes to fund government rescue packages, will also lower growth rates. Once investors realise over the next few months that "an extended period of structurally lower growth" lies ahead, the global rally will falter, says Chris Wood of CLSA.
Nonetheless, while the general outlook may be discouraging, there's still money to be made. As Neil Woodford of Invesco Perpetual points out, defensive sectors with secure dividend growth potential, such as pharmaceuticals, telecoms, utilities and tobacco, look cheap.
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