Half empty or half full?
By Richard Hunter | 04 Dec, 2008
They say that it takes two views to make a market.
As the usual December round of market forecasts begins to get published in anticipation of 2009 (including our own observations in the December edition of “StockHunter”), the difficulty of reading the current market is as apparent as ever.
A recent US research piece – relevant since the US market will probably largely dictate prospects for the UK market next year – suggests that on a historic basis, the only comparable market period was in 1974. If the market movement was to be replicated, then October’s low marked the bottom of the current bear market and it would then be likely that some real recovery would start to be seen in mid-January (interestingly around the same time that the new President takes office).
On the other hand, a document issued by a well known investment firm in the UK decided to overlay an Armageddon scenario on corporate earnings, as opposed to the situation in which we find ourselves today. They concluded that the absolute worst case is a 30% drop in share prices from here, at which time the market would be due a full recovery (even though they have recently also produced research suggesting that most market indicators are showing buy signals). As such, they argue, there is no particular hurry to wade back into equities at the moment, and that patience is a virtue.
Certainly, institutional investors seem to be battening down the hatches at the moment, with the emphasis being on the return of their capital rather than the return on their capital – in other words, capital conservation. This risk aversion is further illustrated by the various volatility indexes (“fear gauges”), which have more recently been running at highs (again).
This is a particularly difficult time to read in investment terms – bear markets tend to throw out violent bear market rallies, only to retrench shortly afterwards (as we are seeing regularly at the moment). Any sustained strength which could lead to the next bull market need to be accompanied by a number of factors which we are far from seeing yet, such as a rebound in corporate earnings – or even the prospect of a rebound.
The current indications would tend to suggest that the first half of 2009 (at least) will be difficult in both economic and market terms. At that time, there is some possibility of a change in fortunes. In the meantime, we will of course continue to read the indicators and mood of the market as best we can and report back accordingly.
