Stock markets are turning down again. Either side of Easter, America’s S&P 500 – the world’s most widely watched share index – dropped by almost 5%.
Sure, the S&P has since recovered some of its lost ground. But what prompted the fall? And is the market missing the point?
The catalyst for the dip was the US ‘non-farm’ payrolls report, says John Stepek. This gives the employment rate and the number of jobs being created in the world’s largest economy. And it’s also one of the most closely watched economic barometers around.
When the March ‘non-farm’ report showed just 120,000 jobs being created instead of the expected 200,000, investors got the jitters.
But while focusing on one indicator is a mistake, says John, “the truth is, markets were due a nasty surprise. Volatility had hit a low in recent months. Meanwhile, Citigroup’s Economic Surprise Index (which provides a rough gauge of whether investors are gloomy or pessimistic) has recently rolled over. In other words, investor optimism has run ahead of reality, which means that economic data are now increasingly giving investors shocks, rather than pleasant surprises.”
The real worry is ‘right-sizing’
“Perhaps more interesting than the jobless data is what Federal Reserve chief Ben Bernanke had to say about the jobs recovery”, says John. “Bernanke reckons companies slashed jobs so fast during 2008 and 2009, they over-reacted. Now they’re having to hire people just to get back to ‘normal’ levels. Polling company Gallup calls this “right-sizing”. The trouble is, once this ‘right-sizing’ is finished, we might well see the jobs recovery slow down.”
“This ‘right-sizing’ could also have an impact on corporate profit margins [which] are currently at record levels. If companies are having to hire more staff again, they’ve run out of space to cut costs. If the economy isn’t growing fast enough to boost sales to a level where they can compensate for the loss of gains from cost cutting, earnings could start to disappoint. And given the state of the rest of the global economy, it certainly seems unlikely that earnings will surprise on the upside.”
Meanwhile, China can’t be relied on to keep global growth ticking along either – for more on why we think China could be a real threat to the global economy, have a look at this report. “So we could be facing a gloomier outlook in the run-up to the summer. And if Europe kicks off again, that could trigger an even bigger sell-off. If you’ve got your eye on any specific stocks or markets, you might well get a chance to buy them cheaper in the months ahead.”
John talks about Europe again here. As he points out, much of the Continent is facing a nasty recession. Though as Merryn Somerset Webb notes, Germany might be just fine. And there could still be other opportunities out there: Matthew Partridge reckons Italian stocks are worth a look.
Value in UK insurers
Back in the UK, Fleet Street Letter investment director, David Stevenson, has been scouting for bargains in the non–life insurance industry. In particular, he’s been runnning the rule over Lloyd’s of London, the world’s leading insurance market,
“Lloyd’s of London meets almost every insurance need apart from life cover. It also deals in re-insurance, which allows insurers to ‘lay-off’ some of their liabilities”, says David. To put it another way, “non-life firms won’t insure you against falling underneath a bus, but they’ll provide cover for damage to the bus itself.”
But Lloyd’s has just reported massive £516m loss for 2011. So does this indicate a big problem, or is it an opportunity?
This deficit was due to 2011 being just about the worst-ever year for natural catastrophes, with floods in Australia and Thailand, earthquakes in New Zealand and Japan, and US tornadoes and hurricanes. Lloyd’s of London underwriters were on the hook for total claims of £12.9bn. But Lloyd’s emerged from the carnage better than you might think, and the losses only made a small dent in its finances.
“The fact Lloyd’s performed so well in such a tough year bodes well for the future. First, there have been fewer catastrophes in the first three months of 2012 compared with a year earlier. This has to be welcome news. But one of the key reasons for our interest in shares in Lloyd’s insurers is the premium rates they’ll be able to charge in future. In a nutshell, rising premiums should mean higher profits.”
David highlights one Lloyd’s underwriter in particular that looks very good value. If you’re interested in finding out more about this – and the Fleet Street Letter overall – click: Fleet Street Letter.
Inequality is ruining the economy
MoneyWeek’s editor-in-chief, Merryn Somerset Webb, has been railing against high levels of executive pay.
“I don’t think that there are too many people who think there isn’t a problem with relative pay in the West”, she blogs. “Those at the top of big organisations get paid too much and those at the bottom and middle, unless they happen to work for a heavily unionised section of the public sector (I give you the Tube), get paid too little by comparison.”
This isn’t just about what seems fair, says Merryn. High levels of inequality are also bad for the economy – and she has the stats to prove it.
“If the bottom doesn’t have enough money, they can’t consume and if the top doesn’t have enough money, they can create bubbles. Income inequality kills opportunity, and it kills growth too”. But that still leaves the big question – “just how the proceeds of capitalism should be divvied up: how much should go to the workers and how much to the lucky few at the top?”
As you’ll see, Merryn has her own opinions on this – and so do many of you.
Thanks for your comments
‘Ellene’ agreed with Merryn and said that a combination of central bank and government policy was to blame. She noted that on one hand “the main beneficiaries of QE have been those with enough extra wealth to be able to invest it for their future”, while on the other, austerity “mostly hits the poorer, younger and most dependent in society and makes the society more unequal”.
‘Critic Al Rick’ had another view, pointing out that “the 1960s was the decade before we joined the so-called Common Market (EU). Yes, in that respect if in no other, we need to go back to the 1960s.”
If you haven’t read Merryn’s blog, and you’d like to have your say, click here.
A disgraced ratio back in favour
Before I go I would like to draw your attention to my colleague Tim Bennett’s video tutorials. Tim’s weekly take on finance has been developing something of a cult following. And his videos are well worth a watch if you haven’t already.
This week Tim tackles the price to sales ratio. It was hailed as the ‘king of ratios’ in the 1990’s before being widely condemned after the dotcom crash. Tim investigates how it works and why it is still popular.
Also, if you missed any of Tim’s earlier videos, or you’d like to watch any of them again, you can access the archive here.
To hear about other bits and pieces on the internet that have amused us or made us think, sign up for our Twitter feeds – we’ve listed them below.
Have a great weekend!
• MoneyWeek
• Merryn Somerset Webb
• John Stepek
• Tim Bennett
• James McKeigue
• Matthew Partridge
• David Stevenson