Stocks shrug off panics

Was last week's slide just "a short-term panic attack", as Marc Gross of RS Investments says it was?

Some equity markets had largely bounced back from the Japanese earthquake early this week as fears of a major radiation leak eased. The FTSE All-World Index has regained its 10 March level. Stocks tend to recover fast after a sudden shock. Gary Evans of HSBC has looked at their behaviour after previous episodes such as major earthquakes and 9/11. The market directly affected would typically regain its pre-crisis level within two months after an average slide of 6%. It bottoms 11 days after the shock. Global stocks fall less, but also recover in two months.

Analysis of the US market, which the FTSE tends to mirror, tells a similar tale, notes Paul Farrow in The Daily Telegraph. After crises ranging from JFK's assassination and Pearl Harbour to the 1973 oil shock and the first Gulf War, the Dow Jones Index has fallen by an average of 7.1%, according to Ned Davis Research. But following the "reaction period", the index is typically 6.3% off the post-crisis bottom after 63 days.

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So, barring a worsening nuclear scare, it may not be long before "the factors driving the market previously come to the fore again", as Evans puts it.

But that hardly implies an easy ride for equities. For starters, the oil price looks set to stay high. The coalition's air strikes in Libya are raising fears of a "long, drawn-out war", as Gaddafi puts it, which could keep its oil off the global market for months. Its pre-war output has slowed to a trickle. "The market is not going to see the return of Libyan oil any time soon," says Jinzhong Zhang of Standard Bank.

Saudi Arabia and other Opec members can make up the shortfall. But there isn't enough spare capacity to make up for another major producer's output faltering, as John W Schoen says on MSNBC.com. With violence spreading throughout the region, this can hardly be ruled out. But "equities are not priced for further oil supply disruption", says James Mackintosh in the FT.

Nor does it help that earnings forecasts are being scaled back and the ratio of upgrades to downgrades of expected profits is falling everywhere. "It is all about earnings. If earnings disappoint, prices will eventually fall," says JP Morgan Asset Management's Dan Morris. Global stocks are still being buoyed by easy money, but they are looking increasingly vulnerable to a reversal.