Is it over? It seems a reasonable question to ask. After all, on almost every measure, global stocks look stupidly cheap relative to the last couple of decades. And perhaps the dramatic bounces in markets this week (with the Dow Jones alone up nearly 11% on Tuesday) suggest investors are seeing that and slipping back from panic to greed once again. And that, as a result, the bear market is at the beginning of its end. As regular readers can probably guess, I don’t buy this interpretation of events for a minute.
For starters, markets aren’t cheap. Look at the FTSE 100. It’s trading on a p/e ratio of just over seven times and paying a dividend yield of 6%. But while these numbers look quite fantastic, they’re also pretty meaningless. Why? Because the important bit of the p/e – earnings – is no more than optimistic guesswork. The real p/e is much higher than that. We just don’t know how much higher.
The same goes for the yield. Is it really 6%? Only if no one cuts or cancels their payout – which, as we enter a massive global recession, doesn’t really seem likely. Just because the market looks cheap doesn’t mean it is. The uncertainty surrounding yield also means that another favourite buy signal for markets, the cross over of bond and equity yields, has to come under suspicion too. In the past, whenever the dividend yield on a market has moved above the yield on that country’s ten- year government bonds, it’s usually been a good idea to pile into the shares. Not so this year. There was a cross over in Japan in January. The Nikkei has fallen 40% since. Then there was one in Britain in September. The FTSE 100 has fallen 17% since. But this may not simply be about dodgy dividend-yield numbers. As Jonathan Allum of KBC notes, there was a time (pre-1950) when equities consistently yielded more than bonds. As equities were more risky than bonds, it was argued, it made sense that those prepared to hold them should be better rewarded for doing so. As an argument, that might have looked like it made little sense during the credit bubble years – after all, if earnings only ever rise, where’s the risk in equities? But it makes sense again now (these days earnings are more likely to fall than rise). That makes the yield cross over yet another buy signal to ignore for now. This week’s market action might signal the start of a massive bear market bounce, but I very much doubt it signals the end of the bear market.
Now for something a tiny bit more cheerful. Mortgage approvals rose slightly in September, as did the number of house sales as recorded by Hometrack. This doesn’t tell us that house prices are going to rise anytime soon (they aren’t), but it does tell us that realism might be returning to some of the market: these sales wouldn’t be getting away if sellers weren’t slashing their prices. That’s good news – it’s only when everyone gets real that the market will eventually clear.