We haven't hit bottom yet

Whatever happened to the bull market? asks The Business. Following a strong run-up that began in March 2003, Western equity markets have been "treading water" for the past two months. And this can't be ascribed solely to renewed jitters over terrorism and the deteriorating situation in Iraq; the lull in the markets began before geopolitical risk returned. So what's gone wrong? Uncertainty over the global economic outlook has grown: last week's British and German industrial production numbers were "appalling" and business surveys, such as Germany's Ifo business confidence index, are falling after soaring for months. High oil prices haven't helped either.

Nor is the earnings outlook auspicious, says Allister Heath, also in The Business. UK fund managers have been rattled by the 37% jump in profits warnings during the first quarter - after nine consecutive months with under 20 warnings, the four months from November to March have all seen 20 or more warnings. And America's expected 17.5% and 15.5% surge in first and second quarter earnings respectively have already been priced into the market.

Meanwhile, amid the darkening outlook for America's debt-addled economy, irrational exuberance has returned to the market, says www.Dailyreckoning.com - witness last week's 16% rise in Yahoo shares to a p/e of 130. "Has the company got a monopoly on the internet business?" No, this multiple is apparently justified by a "lame" 13% rise in revenues. But while the foolish buy tech stocks at crazy valuations, the "smart money" is on the way out: US corporate insiders sold 28 shares for every share they bought last month, marking the 11th consecutive month that the sales-to-purchase ratio exceeded 20. The typical ratio is 2.25 to 1, so directors have little confidence in the outlook.

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They're right there, says Maggie Mahar in the FT: history strongly suggests "the bear is not dead, only hibernating". When a bubble collapses, a market cannot lay down a firm new foundation until valuations have reverted to the long-term average: in the case of America's S&P 500, this means 17 times the previous year's earnings and 14 times the current year's. Indeed, when post-bubble markets "scrape bottom", p/es usually sink below ten. At present, the S&P 500 still fetches 29 times last year's profits and about 18 times this year's, so stocks are likely to enter a second tailspin that will "break the last bull's heart" (note that the post-1929 and 1970 bear markets contained two major sell-offs), or move sideways for a decade as valuations catch up with earnings. And since Wall Street sets the tone,other bourses will be caught in the downdraft, says David Schwartz in The Observer. So much for "buying and holding for the long-term".