This is the (ugly) face of equity optimism nowadays…
From Merrill Lynch economist David Rosenberg’s “We can see a flicker!” note yesterday:
… as things now stand, the market has gone down so swiftly, the way I see it, we are now about 85% of the way through the process of seeing the market discount my macro forecast, which was once from the Dark Side, and has now all of a sudden become much more mainstream. The blue-chip consensus has become so bearish that it now is saying the recession began in the third quarter. So, in the Kubler-Ross five stages of grief, we’ve moved into acceptance, which is thankfully the final but most painful stage.
A bottom is in sight but we aren’t calling it just yet
So, when I say we could be 85% of the way through, the flip side is that we probably have another 15% downside from here. I can tell you that when I mention that to clients now there is almost a palpable sense of relief whereas a year ago a forecast like that would have triggered a heated debate. That tells you just how far we’ve come and indeed the equity market has come a very long way towards discounting a very severe GDP and profits recession to the point where for the first time this cycle I am willing to declare, at least with a small degree of confidence, that a bottom is in sight even though I am not exactly calling a bottom just yet. Please understand that I am not changing my opinion that we will test, and retest those October 2002 lows. Even if the market bounces near-term from what are egregiously oversold conditions, I remain steadfast of that view.
And UBS’s Larry Hathaway had this, even bleaker, assessment yesterday:
A bounce?
If policy makers do produce a credible and comprehensive package including commitments to re-capitalization and bank liability guarantees, markets could bounce sharply off their recent lows. But if they don’t, the prospects appear grim. In our view, it makes little sense in these volatile circumstances to make changes in investment strategy. We maintain unchanged allocations, with a preference for high-quality bonds and defensive equities.
Not a bull
Should policy ‘get it right’ the market recovery could be significant. But beyond gains related to a reduction in extreme risk aversion, markets will be confronted with global recession and a probable period of protracted economic weakness thereafter. The prospects for weaker-than-usual earnings in the years to come limit the upside for global equities.
Not to hammer the point home, but as Hathaway points out in his note, the financial crisis has already seen various “false dawns,” including the rescue of Bear Stearns, the Fannie/Freddie takeovers and the Tarp – none of which proved to be a sustained market turning point. Also, as FT Alphaville noted yesterday, there were eight large rallies during the great Depression — which means the above is probably as (professionally) optimistic as you’re likely to see for a while.
Related links
Credit rationing and depressionomics - FT Alphaville
Gillian Tett: New realism means light at the end of tunnel is no illusion – FT
View of the day: David Rosenberg, Merrill Lynch – FT
The Short View: Tigger time – FT