After the chaos of January, you would have expected the stock markets to bounce, even just a little bit. And they did – the FTSE 100 even managed to claw its way back above the 6,000 mark for a few days at the beginning of this month.
But then reality reared its ugly head this time in the form of dreadful US services data, showing that the sector was shrinking for the first time in nearly five years. Analysts were quick to point out that it was just one month’s data, and from a particularly volatile survey at that, but it’s far from being the only data set throwing up surprising and scary figures at the moment – the most recent payrolls data showed employers are firing rather than hiring.
And any investors hoping for some sort of good news or leadership plan from this weekend’s G7 meeting would have been sorely disappointed. The Bank of Italy’s governor summed up the world leaders’ views on the economic crisis with worrying honesty, saying: “The only thing we know is that it’s big and we keep on discovering new dimensions to it.” They certainly discovered a few over the weekend – the G7 finance chiefs now believe that write-offs on sub-prime will come to $400bn. Given that only $120bn has been written down so far, that suggests a lot of nasty shocks to come.
The truth is that the US economy is heading into, or is already in recession. And it’s gradually dawning on the rest of the world that the dream of ‘decoupling’, is just that, a dream. It has been obvious for some time that the US was headed for trouble, but the hope was that emerging markets – and particularly China – had emerged far enough to prop up the global economy without the American consumer’s help.
It seemed to make sense. After all, China has more than a billion potential consumers. The typical breathless investment pitch for a Chinese stock runs along the lines of – “here’s a Chinese car maker – imagine how much money they’d make if everyone in China bought a car? Here’s a Chinese publisher – imagine how much cash they’d rake in if every Chinese person bought a newspaper?” But the key word here is ‘potential’. As financial blog, LongOrShortCapital, points out, “I’ll tell you what China also has. A BILLION POOR PEOPLE… all looking to buy no things with their no money.”
The failed rebound in markets shows that investors are finally figuring this out and that we are now in a fully-fledged bear market. Yet analysts remain far too upbeat in their earnings forecasts. Citigroup’s strategists reckon that if earnings were to fall as far as they normally do during a US recession, then current forecasts for “2008 US and global earnings growth could be 30-40% wrong.” That’s a lot of disappointment still waiting to be priced into stocks – I suspect this bear market will be with us for a long time to come.
First published in The Evening Standard 12/2/08