Most markets saw in February with solid gains, but so far2010 has been heavy going. The S&P 500 slid by 3.7% in January, its worstmonth since March 2009. The FTSE 100 lost 4%. We've had the biggest correctionglobally since the rally began, says John Authers in the Financial Times.
Bad news is no longer shrugged off, while good newsdoesn't invariably provide a fillip. One problem is that markets had alreadypriced in a strong earnings and economic recovery. The S&P's cyclicallyadjusted p/e, for instance, is 25% above its historic average. The fact thatsurprisingly strong fourth-quarter earnings have been greeted withprofit-taking suggests that the massive rally since March "bought and paid for"strong fourth-quarter earnings, says Michael Santoli in Barron's.
But it also seems that investors are starting to take acloser look at supposedly good numbers. Even the unexpectedly high 5.7%annualised rate of GDP growth in the fourth quarter couldn't give the markets akick last week. The problem? The inventory cycle, which tells us nothing aboutthe strength of underlying demand, accounted for 3.6% of the figure. Andunderlying demand remains poor, says David Rosenberg of Gluskin Sheff. Domesticdemand growth actually slowed to an annual rate of 1.7% in the fourth quarterfrom the summer's 2.3%, despite all the stimulus. With consumers and banksdeleveraging, don't expect a strong rebound anytime soon.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Rather than celebrate the recovery, investors arerealising that growth looks set to be sub-par for a long time, says Neal Sossof Credit Suisse. Fear of tightening is another key theme. The market is like aperson having to "relearn a task after a major illness", says Peter Dixon ofCommerzbank. Markets will have to "learn to do without the huge amount ofsupport from governments and central banks", as recent jitters over China alsoillustrate. Sovereign risk is a new worry for 2010.
The bottom line? In 2009, investors had it both ways,says The Economist. Good news meant recovery, while bad news meant interestrates would stay low and liquidity ample. This year, either the recovery willdisappoint or the stimulus will be withdrawn. The 'sweet spot' markets enjoyedin 2009 now looks over.
-
What happens if you can’t pay your tax bill, and what is "Time to Pay"?Millions are due to file their tax return this Friday as the self-assessment deadline closes. Though the nightmare is not over until you pay the taxman what you owe - or face a penalty. But what happens if you can't afford to pay HMRC your tax bill, and what is "Time to Pay"?
-
What does Rachel Reeves’s plan for growth mean for UK investors?Rachel Reeves says she is going “further and faster” to kickstart the UK economy, but investors are unlikely to be persuaded
