By Simon Laing, a fund manager at Newton The US stock market continues to be rife with uncertain...
By Simon Laing, a fund manager at Newton
The US stock market continues to be rife with uncertainty. During the second quarter of the year, investors were presented with two conflicting views of the US.
The economic data was suggesting that the worst was behind us, with improvements in consumer confidence and the ISM survey through June and July.
However, the continuous decline in the stock market was implying that this was not the case. The Federal Reserve uses the S&P 500 index as one of many leading indicators of the economy, and cites it as one of the most reliable.
So it should not have been wholly surprising that, in August, the economic data took a sudden lurch into negative territory and the market was proven to have been right. Consequently, at the Fed meeting in August, Greenspan hinted another interest rate cut could be imminent.
However, monetary stimulus has not always had the desired result. It could be argued that a cut would only postpone (and accentuate) the problem of 10 years of consumer debt accumulation and a bubble in corporate capital expenditure.
On a more encouraging note, the restructuring of cost bases across corporate America will have a positive effect on earnings and should eventually help capital expenditure.
When companies do start to see accelerating revenues, this will be magnified in the profit figures that these companies earn.
Predicting these revenues is key however, and current estimates for 2003 would appear to paint a rosier picture than looks achievable.
Sentiment is another important driving factor for the markets. Many stocks have fallen, but the nervousness of investors has meant several companies have seen their share prices tumble because of false rumours or re-hashing of old news.
Recent work by ISI Group has shown that, year to date, the top decile of S&P 500 stocks has risen 22.5%. The bottom decile has declined 72.2%.
The market has developed an attitude of act first, ask questions later when dealing with surprises.
This has meant that outperforming has come more from avoiding the pitfalls, rather than picking the winners. While confidence will take time to rebuild, the good news is that the SEC has aggressively been taking steps on this issue.
The television pictures of the Rigas family (Adelphia Communications) and Sam Waksal (ImClone) being led away in handcuffs, gives a strong signal to corporate officers and investors, about the treatment for white collar crime.
Further good news lies in stock valuations ' while not as low as the levels seen in previous bear markets in the 1970s and 1930s, they are a lot more palatable than much of the last decade.
In addition, the last time that the S&P 500 declined for three consecutive years was the 1939-1941 period.
The index then promptly doubled over the following four years. It is unlikely that history will repeat itself but it does indicate the level of negativity surrounding US equities.
Corporate integrity is being re-built.
Reduction in cost bases means better leverage.
Valuations in some sectors are reasonable.
Economic uncertainty remains.
Market earnings estimates too high.
Investment mistakes are very expensive.
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