Regular readers will remember how irritated we at MoneyWeek got in 2008 and 2009 when stockmarket bulls kept telling us to “look through the valley”. The stockmarket was such a brilliant forecasting machine that we shouldn’t fret about deflationary depression and the like, they said – that was already more than discounted. We should be looking beyond it, as the market was, and pricing in the coming recovery.
We didn’t buy this. First we were never entirely sure that the market did work as a forecasting machine. Second, if it did, we didn’t think that it ever did a good job. Let’s not forget that the stockmarket continued to hold up – forecasting a rosy future – for months after the US housing implosion kicked off. And let’s not forget that the sustainable recovery the market has been forecasting for the last year and a half has yet to materialise.
So it’s nice to see that the latest note from Albert Edwards at Société Générale seems to debunk the “ludicrous” idea “that the equity market predicts anything”. In a post-bubble world, says Albert, the market “reacts to events rather than preempting them”: it doesn’t offer any clues to the future, it just follows the economic cycle. So to steal a march on it you just have to keep a close eye on the global economy’s leading indicators.
What are these telling us now? That we’re set for either a hard landing or, “at best, a decisive slowdown”. Our own James Ferguson points to a slide in online spending in the US and to durable goods orders (a measure of consumer spending on long-term items), which are now negative on a three-month average. Neither of these things bode well for consumption for the rest of the year.
Also, the equity market often doesn’t begin to fall until after analysts have begun to react to bad economic news by cutting their corporate earnings estimates. They haven’t done this yet, but it is hard to see how they can hold off for much longer given the signs of slowdown ahead, and given the shift we’ve seen in market sentiment.
At the start of the summer most people we spoke to backed the V-shaped recovery and sniggered at the very mention of the miserable future forecast by Albert and James. Today, you’d be hard pushed to find anyone willing to mock a double-dipper.
There has, says Edwards, been a sharp slide in measures of analyst optimism: that suggests “we are right on the cusp” of seeing them all slash their forward earnings forecasts and hence, given that the market turns out to be a follower not a leader, of another lurch down in share prices.
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