It wasn’t just China that dampened market spirits early this week. Last week it emerged that US monthly job losses had accelerated in December. And enthusiasm about the global recovery was also hit on Tuesday as earnings reporting season began in the US. Aluminium giant Alcoa was the first to report and promptly missed its consensus earnings per share estimate. The stock dropped almost 10%.
What the commentators said
The trouble is that there is no margin for error. “Stockmarket valuations enshrine very strong earnings growth for this year,” said John Authers in the FT, and so bad news can “send them spinning”. The MSCI World index is on a trailing p/e of 35 and the S&P 500’s cyclically adjusted p/e is 50% above the long-term average.
US analysts are hoping for profit growth of 36% in 2010, said David Rosenberg of Gluskin Sheff. But given the state of the economy this looks wildly unrealistic. The US has had a “gargantuan fiscal and monetary stimulus”, and yet in the third quarter it only grew by an annualised 2.2%. A typical growth rate in the past for the first quarter of growth after a recession is more than 7%. The labour market is still a “horrible” mess, with the broadest measure of unemployment and underemployment at more than 17%. Payrolls are barely up from 2000.
The stimulus isn’t stopping banks and consumers from retrenching: consumer credit fell by a record monthly total in November, marking the tenth month of declines in a row. Meantime, bank lending to households and businesses is down over 7% year-on-year, “an unheard -of decline unless you want to go back to Japan in the 1990s or the US in the 1930s”. Markets should stop hoping for a quick recovery and realise that this is an “ongoing” post-credit bubble collapse.