Shape of the stock market recovery
V is the mould in which the market has been cast. With a correction expected in the second half of May and during July-September, those who invested for the long haul will emerge winners, says Sunil Kewalramani.
It is not only global stock markets that have traced out a V shape in the 19 months since Lehman. Most world economies have experienced a business-led recovery with technology , infrastructure, materials and energy leading the way. Stocks today are cheapest since 1990 on a ‘V-shaped profits boom’ basis.The script of the Greek tragedy and choreography of the Spanish dance are by now baked into the cake. Stock markets move on new news, not old news. You cannot get junkier than junk.
The script of the Greek tragedy and choreography of the Spanish dance are by now baked into the cake. Stock markets move on new news, not old news. You cannot get junkier than junk.
The GDP-weighted global yield curve — spread between long-term and shortterm government interest rates — is steeper than it has been since the 1960s. Banks borrow short-term money and lend long term. A wider spread means higher bank gross operating profit margins . This is bullish because it reflects future eagerness to lend and has historically been a great market-timing tool.
The spread between 10-year Treasury yields and the average cost of credit default swaps has narrowed to zero, indicating the US economy — at the epicentre of the credit crisis — is keyed to expansion and credit demand, which is bullish.
Investor’s mood is to notice anything bad — 9.5% US unemployment, the RBI’s rate hike, Chinese rate tightening and risk of its bank lending atrophying — while treating anything good — narrowing credit spreads and fiscal consolidation steps in Budget — with trepidation. Healthcare legislation in the US is an Obamanation, and so on. This is the wall of worry bull markets love to climb.
Does China matter? On February 26, 2007, the Shanghai Composite index, which had rallied for months, suddenly fell 268 points, or 8.8%. A global selloff ensued. As it turned out, the first Shanghai bubble kept inflating for six more months before popping in October 2007. The benchmark Shanghai Composite Index has recently fallen to its lowest level since last September when China’s economic recovery began to gather pace.
Administrative measure has been announced to curb real estate speculation including raising minimum deposit and interest rates for home mortgages, reintroducing a sales tax and outright ban on families buying third homes.
A soft landing for a bubbly housing market could help underpin the rebound in the economy in the medium term. If impact on prices is limited, it could force the authorities into harsher measures that could be devastating for an infrastructure-reliant economy such as China’s .
Looking at global trends, stock prices could correct in the second half of May and between July and September 2010. Washington’s relationship with Wall Street could get so schizophrenic as to lead to the arrival of the Minsky moment at which markets could correct.
However, as the enclosed chart illustrates , those who invest for the long haul emerge winners. In the short term, the V will continue until all sceptics have given up. Only at that point will the stock market sketch out a W.