Inevitable really. A week or so of sharp gains, the S&P up 12 per cent (and counting), and people start talking about equity markets bottoming and bear markets ending.
The bullish case is easy to make. Equities are cheap (on most measures), sentiment is incredibly bearish, there have been further policy initiatives – quantitative easing in the UK and the Swiss franc intervention – and there are signs of some commodity prices picking up. On top of that Bank of America, Citigroup, JP Morgan and now Barclays have all reported a strong start to the year.
But before anyone gets carried away this rally, bounce, recovery (delete as appropriate) needs to be put in context.
As the graphic from Citigroup below shows, European equities have seen 17 (now 18) market moves, in either direction, of more than 10 per cent since the start of 2008. Remarkably, seven of these have been moves of than 20 per cent.
In that light, the current advance, in Europe at least, looks unremarkable.
Even more so, when compared to nine other bear market rallies. As the table below shows, these have averaged almost three and half months in duration and markets have risen an average of 20 per cent.
Of course, that doesn’t mean this bear market rally won’t become a proper bear market rally. However, the idea of it morphing into the next bull market looks to be a much longer shot, as Teun Draaisma of Morgan Stanley noted on Monday.
We continue to think that fundamentals are bad and we expect earnings and US house prices to trough by the middle of 2010, while banks balance sheet quality is not sorted out either. Patience and capital preservation are key. Valuations are not rock bottom (we have been as low as a Shiller PE of 4x in the US in 1932, 6x in Europe in the 1970s). We remain strategically cautious and would view significant strength to sell into.
Enjoy it while it lasts.
And remember, 20% on the S&P from its closing low of 676 from last Monday would mean the index trading at 811.
Related link:
All about bottoms - FT Alphaville