Spring has put a skip in the heart of the investment community.
The brighter mornings, and the occasional glimpse of sunshine as the winter clouds dissipate, must have City workers smiling as they trot to the train station in the morning.
Combine that with a swathe of less-bad, and even good news, last week, and it’s little wonder we’re seeing such a strong bear market rally. But that’s all it is. And with reporting season coming up, we could see investors’ hopes crushed as rapidly as they’ve been built up…
More government spending isn’t really good news
Last week saw plenty of relatively upbeat news to build a stock market rebound on. But most of it was actually pretty weak when you delve deeper.
We’ll start with the G20. No one had expected anything to come out of it, so the fact that we got headlines proclaiming a $1.1 trillion stimulus made it look like a success.
Let’s put aside the fact that more government spending isn’t really something to get excited about. The reality is that the $1.1 trillion boost wasn’t anywhere near that in any case. The FT reckons that of the $500bn promised to the International Monetary Fund (IMF), around $250bn had already been organized, and there’s at least $145bn that hasn’t actually been found yet – it’s just an “aspiration” rather than real money.
And the $250bn for trade finance turned out to be something closer to $4bn – the $250bn is the amount of trade that governments hope to finance, not an increase in the credit lines to finance it.
So as usual with Gordon Brown, there was a lot of smoke and mirrors. But the absence of a complete disaster at the G20 wasn’t the only thing driving the stock market higher. We had news that house prices rose (well, month-on-month at least) in March.
This amazingly encouraged a spray of articles about the bottom of the housing market. This all seems somewhat premature to say the least. For a start, the Halifax came out the next day with a report saying that prices had actually fallen in March. But more to the point, focusing on one month’s figures with these things is always silly. They can be pretty volatile – as Roger Bootle of Capital Economics points out in The Telegraph this morning, during the early 1990s crash, from March 1989 to July 1995, 22 months saw month-on-month house price rises. So you can’t really expect prices to fall every single month.
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And given that this recession is worse than the one we had back then, it doesn’t seem too unreasonable to expect that house prices will take at least as long to recover as they did then. On top of that, as Lex points out in the weekend FT, “to judge by the US, where prices started falling a year earlier than in the UK, there is still a good way to go.” Prices in the US are down 30% from their peak in 2006 – the average British house price is still just 21% lower than in August 2007.
Why are we seeing this rally?
But what about the stock market bounce? After all, the stock market is a predictive tool. It doesn’t respond to what’s happening right now – it sees the recovery coming, and then it bounces.
There are a few responses to that – such as, the stock market wasn’t that great at forecasting that most of the UK banking system was in fact, bust. But we’ll ignore that for now. What does conventional wisdom suggest about the current rally?
Well, as James Montier from Societe Generale points out, “it isn’t the bubble stocks which tend to lead us out of the fugue state. Thus the prominence of emerging markets, mining and financials in the recent rally makes me wary.” Lex puts it a little more brutally: “it is the trash that has done best.” Stocks such as AIG, Citigroup, indebted retailer Debenhams and builder Taylor Wimpey are among the biggest risers of all. “This is not investment; it is speculation.”
This, says Lex, is exactly what happens in a bear market rally – investors get suddenly excited because the news isn’t quite as bad as it has been. The spurt of optimism sees them start piling back into cruddy stocks simply because they look a lot cheaper than they did at their peaks. But all it takes is some more miserable news to knock them back off their stride.
Don’t buy yet
And more bad news “is likely when reporting season begins anew.” As Stephanie Giroux of US broker TD Ameritrade points out to Bloomberg, America’s problems will take a lot longer than a couple of quarters to fix. Consumer spending accounts for about 70% of the US economy, and this will “stagnate for years as Americans pay debts and businesses cut jobs.” As she puts it, “you’ve taken a big engine of growth out of the system for a while… The consumer has really driven growth in the economy, and the stock market is a proxy for that growth.”
When it comes to markets, where the US goes, Britain (and most of the rest of the world) can be expected to follow. And with our own economy heavily dependent on equally indebted consumers, it seems likely that there’ll be plenty of disappointments from British companies too. Suffice to say, I wouldn’t be piling into the market as yet.
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