Sep 13 – a date with destiny for global markets

3 mins. to read

The 2008 financial crisis caught investors well and truly off-guard, decimating equity valuations across the globe to the tune of trillions, toppling the US &  Western European housing markets, destroying millions of jobs & finally, infecting sovereign debt markets. Central banks and governments around the world have since made huge efforts trying to put their economies back on track but many problems still remain evidenced by the regular bailing out of the weaker European countries, lacklustre growth around the globe and the perpetual money printing antics of the BoE & the Federal Reserve. To top it all, the impossible also happened – the  US Government saw its debt rating cut from AAA to AA+. While the world still seeks a solution to the aftermath of the Great Financial Crisis, it seems that the script has been lost by US equities in particular which are now approaching multi year highs (see chart below) .

Nasdaq (blue); Dow Jones (green), Black & Red (S&P 500)

Equity valuations are of course based upon expectations about the future. With corporate America just ending another quarter, the preliminary numbers show it was one of the worst of the last few years. The percentage of companies beating the street earnings estimates was less than in other quarters and in terms of revenues, the picture is even darker, clearly signaling increasing difficulties the companies are facing to sell their products as a deep crisis continues to mounts in Europe. Under such a scenario, it is legitimate to ask ourselves whether equities whose valuations anticipate a much brighter future are now too inflated due to central bank monetary interventions or whether in fact these valuations discount a more rosy future than the majority of commentators are expecting..?

Since the bottom in equities hit in March 2009, the S&P 500 has risen more than 108%, the technology rich index Nasdaq 100 by an amazing 166%, and Gold has seen its price almost doubled. It is true that valuations were severely cut in 2008, and that many equity indices saw their values halved but the economic recovery from the deep recession that befell economies around the globe in 2008-10 has still not been fully recovered – in contrast to equity indices. The US housing market is still depressed, unemployment in the country is still elevated, growth rates currently being experienced not just in the US but around the world are pale to say the least (see table below)

It seems that the excess liquidity that the major central banks are creating is  lifting all boats and that investors continue to expect (hope) that ultimately this will translate into increased and momentum generating economic activity leading to healthy growth. The problem is that the money thrown by central banks so far hasn’t been sufficient to boost the economy and make it grow. Even with mortgage rates at multi-year lows, the US consumer doesn’t want to buy houses and the US businessman doesn’t want to invest – it seems there is still the fear of the economic “bogeyman” gnawing away at the real economy.

To compound matters, in recent weeks there has been ever growing noises out of the  FED that QE3 is far from a certainty. Ben Bernanke has been playing a game of cat and mouse with the markets in order to buy time but at some point they will meet and there will be a stand off! Under the current situation, with equity prices at multi-year highs, any FED action would likely have a limited effect as unlike in 2009 expectations are high and so the power of surprise is gone. September 13 (the next FOMC meeting date) is a date with destiny for investors around the globe and will likely set the tone for the balance of the year. No QE and investors will re-evaluate their holdings and Gold in particular looks vulnerable to a disappointment – a viewpoint we have been exploring more and more on this blog in recent weeks.

If you have good gains in the bag for the year, it’s time to begin protecting them and rotating out of the outperformers like tech into the laggards like mining.

Filipe R Costa

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