You can see why many investors are “worried that the claws of yet another bear trap” have been “sharpened”, says Michael Mackenzie in the FT. The FTSE 100 had gained 17% by late last week and the S&P 500 23%, marking its best four weeks since 1933. But chances are “this rally will peter out”, says Buttonwood on Economist.com.
Last week saw some less-awful-than-usual data and the G20’s pledge of $1trn to bolster the economy. But much of this had already been announced or adds up to far less than meets the eye. In any case the G20 didn’t address the fact that we have yet to purge banks’ toxic assets, the main precondition for a sustainable recovery, says Lex in the FT.
It’s also worrying that the good mood in equities hasn’t been accompanied by an improvement in corporate credit, which typically leads the way for equities in solid bull runs, as it is a harbinger of economic recovery. And look at the sectors that have done best: generally sustainable post-bubble rallies “are not led by the bubble darlings”, says James Montier of Société Générale. Yet financials have led the way, heavily indebted retailer Debenhams has doubled, and consumer discretionary stocks in America have gained 40%, despite the negative wealth effect from the collapse in housing and the poor employment outlook. No wonder the rally has been called a “dash for trash”.
Markets will be in for a rough ride over the next few weeks as the US earnings season has just begun, so they will be forced to confront, rather than ignore, bad news again. The first quarter will be a “reality check” for investors, says Charles Dautresme of Axa Investment Managers. Further disappointments are on the cards: margins are still falling from all-time highs and can halve in recessions, notes Lex, while according to Morgan Stanley estimates for 2009 need to be revised down by another 30%. Interestingly, the earnings reporting season often brings US investors back down to earth. Bespoke Investment Group says that since mid-2001, buying the S&P 500 on the first day of the season and selling it on the last day would have netted an investor 27%. Doing the reverse would have produced a gain of 7.1%.