Before the terrorist attacks in America, aggressive interest rate cuts by the Federal Reserve since ...
Before the terrorist attacks in America, aggressive interest rate cuts by the Federal Reserve since the beginning of 2001 pointed to a modest recovery in the US economy early next year. The outlook for the US economy and stockmarket are now more uncertain. Ian Brady, Head of US Equities at Schroders offers the Schroders view on what to expect going forward.
Many commentators believe the recovery in the US economy will now take longer than anticipated. We do believe that this will put it back a few months, but we still expect recovery in the first half of 2002.
The US consumer has kept the economy going over the last year, and it is uncertain how much this will damage confidence in the short term.
However, the Federal Reserve has once again reacted swiftly to the situation by cutting interest rates for the eighth time this year (to 3%), and this will help to boost spending.
In the months ahead, a reconstruction process will begin in New York. Companies will need to replace capital equipment and technological infrastructure. Although GDP growth could go into negative territory in the short term, this rebuilding will stimulate growth again.
Markets always move sharply on the back of unexpected bad news. But history shows us that in all but two of the last thirty crises since the second world war, markets were higher six months after the event
There are parallels between today and the Gulf War. For example, before Iraq first invaded Kuwait in August 1990, US economic growth had been slowing and the Fed had been cutting interest rates in response.
This event and the subsequent US response paralysed spending, as consumers became worried and stayed at home glued to their TV sets. This tipped the US into recession and a bear market ensued.
However, within three months of the event, US markets started to recover - which was actually five months before the US emerged from recession.
So while the short-term outlook is undoubtedly clouded, any downturn after this kind of shock, more often than not, is short lived. We are quite optimistic the market will be higher in three months.
Company earnings estimates are fluctuating in the aftermath of this tragedy as analysts try to assess the potential impact on the economy. However, earnings have been falling throughout the year and revisions for 2002 continue. The consensus was around $42 per share this year and $46 in 2002, compared to around $50 last year.
Longer term, the more important factor for equity markets is that interest rates have fallen sharply in 2001. The last time interest rates fell this dramatically was between 1989 and 1993. Between June 1989 and December 1993 earnings fell 18%; at the same time equity markets rose 45%. This was possible because investors looked through the current environment to the longer-term benefit of low interest rates on earnings growth.
So, I would really encourage people not to throw in the towel, and try to think more than one or two months ahead.
In the near term, earnings among consumer, leisure, and technology companies are likely to suffer. On the other hand, some of this has already been discounted in the market.
Insurance stocks have been hard hit along with airlines, for obvious reasons. We are not distracted, however, from the longer-term opportunities that many of the companies within this sector offer, and will be buyers if they drop another 10% or 15%.
The outlook for technology is mixed. Some companies will benefit as New York rebuilds and need for storage and servers increases. We should see some accelerated demand in the fourth quarter.
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