Are we there yet?, asks John Authers in Tuesday’s Short View column. Many in the market are plaintively asking if the sell-off can end and if we can indulge in a rally.
The weekend brought a welter of Wall Street research, ably demonstrating that the New Year sell-off had been overdone (it has), and that the market was poised for a rebound.
One point – that we can blame everything on Jérôme Kerviel – is wishful thinking.
But there are four better points arguing for a bounce:
First, valuation. Stocks look cheap compared with bonds, particularly in Europe. Merrill Lynch says dividend yields on European stocks are now lower in relation to real bond yields than at any time since 1983.
Second, the pessimism on the economy looks overdone. Belief in a US recession is based on a few data points in series that are erratic.
Third, there are arguments over liquidity. The angst seems finally to have afflicted retail investors. Emerging markets funds had their worst net withdrawals ever last week, according to Emerging Portfolio Fund Research, and equity funds in Japan, the US and Europe also saw redemptions. When retail investors give up, it is often time to buy.
And technical patterns provide a final argument: stocks rarely fall so fast without a bounce at some point. Even in the bear markets of 1929 and 2000, there were opportunities to make money on rallies.
Sadly, only the technical argument looks convincing.
On the economy, we will have plenty of new data by the end of the week. If the news is good, stocks will bounce; if not, not. Recession risks have risen.
Long-term valuations, given that earnings and profit margins entered at historically high levels, do not look cheap.
As for liquidity, if this were a bottom, there would be a surge in cash-funded takeovers. But companies are selling equity, through rights issues, not buying it back.