Rudi's View | Nov 06 2008
(This story was first sent out via email to paying subscribers on Tuesday).
By Rudi Filapek-Vandyck, editor FNArena
Are we finally going to see a more extended upswing for equity markets? (As in: a rally that lasts longer than three days maximum?)
It is without any doubt the most asked question by investors these days.
About a year ago, around this time, I suggested the year 2007 would possibly end without the traditional Santa (or Christmas) rally for share markets. This in itself is a rather bold suggestion to make, as almost every calendar year -and I repeat: almost every calendar year- ends on a positive note as far as share markets are concerned.
One of the reasons why I suggested 2007 might be different is because of the strong rally that took place after the August sell-off. It turned out my suggestion at the time was correct. Most share markets peaked in late October, early November and gradually reverted to lower regions. By the time investors returned in early January, this gradual downshift had developed into a consistent wave of selling orders. The rest, as they say, is now history.
That in itself is good news, because this year has been pretty much the opposite of last year: no big upswings, no peaks, and lots and lots of new share market lows. The sell-offs in September and October have been pretty much the worst most market participants -both retail investors and professionals- have ever witnessed. And let’s not forget: these sell-offs have followed on from heavy corrections already from last year’s peaks.
It is only fair to say the odds are once again stacked up in favour of a positive upswing in the run up to the New Year celebrations. Could this be the early stage of something bigger?
I’d like to make a distinction between a “rally” and a “recovery”. In the first instance we talk about share prices moving up for a given amount of time, in the second instance rising share prices come with a dose of sustainability. A bear market has many rallies, as we have all witnessed since November last year. Only one of these rallies can mark the “recovery”; in essence the transition from markets captured inside a strong downtrend into a situation where share prices at least no longer reach for new lows.
On the basis of this distinction I’d be inclined to say yes, we are likely to see an end of year rally this year. (Don’t forget: history is on my side as nearly every calendar year ends with such a rally). I remain sceptical whether any rally will mark a “recovery”, however.
The reason for my scepticism is very straightforward: too many trends are still negative. Not only are economic data still surprising to the downside, they are also likely to become worse in the months ahead. On top of this comes the fact that economists are still lowering their growth forecasts for the years ahead. Companies are still scaling back expectations, and issuing profit warnings. And securities analysts are still way too positive in their earnings projections for next year.
This does not mean next year should automatically see new share market lows, by the way.
Of course, at some point during the year in front of us, these trends will start reversing. But for now it is still too early yet. This is why I don’t think this year’s Santa rally has the potential to become something more than just a rally. This, however, shouldn’t deter anyone from trying to make the most of it.
By Thor, we’ve all lived through possibly the darkest and most challenging time for global financial markets we’ll ever experience, so we might as well enjoy the little pleasures that come our way from here on.
(Due to technical problems this week’s Weekly Insights is shorter and not in its usual format. We expect to publish in our usual weekly format again next week).
