Declines in world equity markets were accelerated dramatically in September. Recent market weakness ...
Declines in world equity markets were accelerated dramatically in September. Recent market weakness means that the US, for example, has now experienced one of the worst bear markets in modern history. In terms of duration and magnitude of fall, only the 1972-74 period has been worse.
Even before 11 September, markets had been falling as US and UK companies in particular gave negative guidance on future prospects. Compounding this was a rapid deterioration in consumer confidence ' one of the few previous bright spots in US economic activity.
However, countering this gloom were the first tentative signs of a recovery in the US manufacturing sector, with two consecutive surveys pointing to a rapid decline in the rate of contraction as inventory levels were finally run down. Overall, therefore, investors were left with the view of an anaemic short-term outlook for the US economy, which, in Alan Greenspan's words, was 'bumping along the bottom'.
However, the events of 11 September considerably altered this view. Much US economic activity came to a virtual halt in the first few days after that day, with consumer spending understandably contracting further.
To correct this, the action of central banks worldwide has been swift. An initial round of co-ordinated rate cuts has been followed by further reductions in the following weeks.
Other significant actions include a massive increase in liquidity being pumped into the global financial system, and plans for a significant increase in central government expenditure ' principally in the US. The massive economic stimulus package recently announced by President Bush is the most recent attempt to revive the US and global economy. These measures should be sufficient to drag economic activity out of recession quickly, with the US returning to above trend growth by the third quarter of 2002.
We therefore expect that the next six to 12 months will be a rewarding period for equity investors, with some of the falls of the past 18 months reversed. Immediate prospects are impossible to predict however. Markets remain deeply oversold and valuations are attractive from a historical point of view.
In the absence of a significant deterioration in the political situation, markets will continue to move favourably to discount the recovery. Forecasts now discount at least one further round of profits downgrades.
A prospective improvement in economic activity, and resultant improvements in corporate trading, will therefore feed swiftly through into equity valuations. But the prospect of ground action in Afghanistan, the recent and growing incidence of Anthrax cases and an escalation of Israeli/Palestinian tension provides potential new causes for concern.
The awful events of 11 September have probably pushed back the US (and hence global) economic recovery by about six months. Recent action by governments and central banks, however, means we now expect the economic rebound to be sharper than before, and markets should move favourably on this over the next six to 12 months.
Good monetary environment.
US economy showing signs of recovery.
Valuations attractive on historical basis.
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