It looks like the rally’s finally arrived.
With the world’s governments committed to bailing out their banking systems, and the idea of a global recession no longer a horrible surprise, markets have a moment to breathe again. And as they take stock, investors are clearly thinking that they’ve sold off too far. Markets around the world have bounced sharply this week.
So is this the end of the bear market? Not by a long chalk – but that doesn’t mean that there isn’t anything worth buying out there…
Why global stock markets have rebounded
At first glance, there’s not much reason for global stock markets to have rebounded. Interbank lending rates have crept down a little, but are still nowhere near central bank base rates. And the bail-outs might not be over yet. Federal Reserve chairman Ben Bernanke said yesterday that the economy might need another “stimulus package” to go with the $150bn in rebates sent out to taxpayers earlier this year. The market seemed to cheer this, even though it suggests that he’s rather running out of ideas.
In Britain meanwhile, public sector borrowing figures made a mockery of Alistair Darling’s “Keynesian stimulus” plan (see Darling’s wrong: we can’t spend our way out of recession).
But the market bounced anyway, with the FTSE 100 rising 219 points to 4,282. Why? Because it was due a bounce. Risk aversion has recently hit never-before-seen heights. The Vix index, Wall Street’s fear gauge, reached 81 in the middle of last week. When you have this kind of panicked plunge, a rally is bound to happen once it’s over and everyone catches their breath.
Moreover, this weekend marked the first in a while that hasn’t seen a major bail-out from a Western government, or another big financial institution go to the wall. South Korea and some other smaller countries, such as Ukraine, are in trouble, but given recent events, that almost seems like business as usual.
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And then of course, we have a variety of star investors, including Warren Buffett and Anthony Bolton, and even more bearish commentators such as GMO’s Jeremy Grantham, saying that they reckon at least some stocks look good value.
So the rebound is only to be expected. But this doesn’t mean the bear market’s over. The economic data in both the US and the UK is going to keep getting worse. The Ernst & Young Item Club said yesterday that it reckons the UK economy will shrink by 1% in 2009, with three quarters in a row of falling growth. I suspect even that is optimistic – which means more nasty surprises ahead for markets.
House prices look set to keep falling
The housing market – which is pretty much the root of the current problem – is still in deep trouble. Gross mortgage lending fell by 10% month-on-month in September, to £17.7bn, according to the Council of Mortgage Lenders. That was the lowest level since January 2001. The CML believes the gross lending total for 2008 will be around £255bn, from £363bn last year. More importantly, net lending (which includes mortgage redemptions) will come in at just £40bn, compared to £108bn last year. That’s a huge collapse in lending, which won’t reverse any time soon – even if banks start to ease up on lending conditions (which is a big ‘if’) people simply don’t want to buy houses while prices are falling.
So we can expect house prices to keep falling, and that means we can expect consumer spending to keep falling, along with corporate profits. For example, cooker maker Aga yesterday reported that sales of its cookers are 15% lower than they were last year. And falling profits mean rising unemployment – Aga plans to cut investment by a third this year, and already 270 jobs have gone at the company, mainly in the US, reports The Times.
So although stock markets generally bottom out before the recession ends, we’re not yet far enough into the current recession for that to have happened yet. There’s plenty of bad news and earnings disappointments to come.
But even if stock markets are likely to fall further in the near future, that doesn’t mean there’s nothing worth buying. Amid the indiscriminate selling off, some decent companies have been sold down too heavily. The problem is picking which ones will survive the turmoil of the next few years, and avoiding those that won’t. In this week’s MoneyWeek, out on Friday, my colleague Tim Bennett tells you how to tell the difference. If you’re not already a subscriber, subscribe to MoneyWeek magazine.
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