There has been a lot of pessimism about the economy over the past few weeks. Today was a big relief rally on news that some companies like JP Morgan and Intel had fared better than feared.
For those of us that had anticipated present problems before they became widely recognized, we can’t help but feel surprise now at how “unexpected” recent bad news is to many mainstream commentators.
That said stock markets have been thrashing wildly in violent fits and drops. Will markets break out to a fresh new bull from here? Obviously no honest person can say with certainty. Those of us that know markets well know that strange things can happen. But it is noteworthy that healthy market expansions do not exhibit this extreme volatility day to day, week to week. Healthy markets are not so bi-polar.
For the time being, we are watching our technical indicators with care as always. If there is a meaningful and sustained break through long-term support we will see it. But we are not there yet. Until then we are still in a bear market, the same bear market that we have avoided while it harmed others over the past 12 months.
Fortunately we are not desperate to pile back in to ride this wild market wherever it may take us. That is the beauty of having a management discipline while others flip-flop madly about.
Markets may rally on hope that the credit crunch worst is past. That may be correct. But I suspect that even if it is, more typical cyclical issues will inevitably stomp into focus:
Without question world economies are now fully into a contracting phase. It typically takes at least 3 quarters of disappointing earnings to put in a bear market bottom. So far we are through only one.
Analyst expectations have traditionally lagged earnings reality for exactly one year.
This is why analysts are so little help to those of us trying to avoid down market losses.
Notwithstanding large downward revisions, consensus earnings expectations over 2008 are still a high 10.8% growth. Presently stock prices are discounting a further earnings decline from here of -8% in the US and -24% in Europe. Even in the past 2 shallow recessions of 1991 and 2001 earnings fell -20% in the US and -40% in Europe. In longer contractions, earnings declines of 45-50% would be “normal”.
Buy or hold recommendations on stocks are now at 95% or the highest in 5 years.
In the past 6 recessions, US markets have lost an average of 28% peak to bottom over 9 months. Canadian markets have traditionally lost more thanks to over-exposure to cyclical sectors: financials and commodities. Relative to historical precedent, market losses to date have been remarkably shallow and short.
Crude-oil prices settled at a new record high for the third trading session in a row, closing at $114.93 on the New York Mercantile Exchange, an advance of 1%. Crude futures have risen 4.4% over the last four trading days and climbed 13% so far in April. Inflation caused by this will be a negative tax on us for some time.
Property prices continue in a free fall in many countries around the world. The US bubble has been mirrored in dropping prices now in Ireland, Spain, the Baltic States and parts of India. Some experts are warning against the potential for a wholesale collapse of the property market in some of these regions.
And last but certainly not least, we are only just started into the corporate bankruptcy fall-out from recent credit shocks. Growing numbers of companies are now struggling with rising defaults in a market where it is virtually impossible to get refinanced.
Cory’s Chart Corner
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