Cut out and keep
By Richard Hunter | 16 Jul, 2008
The old market adage is that a bull market needs to climb a wall of worry. Unfortunately, the wall is currently smothered in anti-climb paint.
Not that the figures mean anything in themselves, but it has been widely reported that we are now in bear market territory, having dropped some 23% since the 2007 peak and, indeed, 20% this year alone. Investors in and commentators of the market will not have needed this confirmation, since this has felt like a bear market for some time now, both in terms of pessimistic sentiment and a lack of adequate buying pressure.
Furthermore, the nearer term prospects are not particularly promising, either in terms of the UK economy or the market itself.
Nonetheless, part of the investor’s toolkit is being able to recognise some potential glimmers of hope or, as the market insists on calling them, positive “inflection points”.
In the current environment, these turning points are possibly not even on the horizon, but a combination of any of the following (in bold below) might be useful alerts to the day when this particular bear market begins to become less grizzly.
Firstly, some proof that inflation has peaked. This in turn would change the interest rate outlook with the possibility of any cuts becoming a probability. (The current situation, underpinned yet again this week by the rise of inflation to 3.8%, all but removes the possibility of a cut in the near term).
Corporate earnings trough, so that future comparative figures become less onerous. At this point, companies are able to envisage a stronger environment going forward and can benefit from the strict cost cutting strategies they have needed to employ during the downturn. (The number of corporate earnings downgrades is currently on the rise, and on both sides of the pond the imminent second quarter earnings season should provide further proof of the slowdown).
There is a fall in the oil price, which removes an inflationary pressure which is currently having a negative global impact. As a side issue, depending on the reason for the oil price drop – such as the removal of geopolitical tensions – this could have wider psychological benefit for the market. The ongoing demand and supply imbalance, coupled with geopolitical worries, are combining to spike the oil price on a regular basis. The additional concerns of the summer season (when petrol is in particular demand in the US, the world’s largest consumer) and any possibility of hurricane disruption are also weighing heavily.
Perhaps the darkest hour is before dawn – and perhaps we have not yet reached that point. It may be just as well, however, to be armed and ready when the time comes.
