ANALYSIS:Analysts are cautioning that the recent US upturn is yet another sucker's rally
THE US stock market may recently have enjoyed its strongest four-week rally since April 1933 but a growing number of strategists are cautioning that this is yet another sucker’s rally rather than the springboard to more long-lasting market gains.
George Soros, the world’s most famous hedge fund manager, shook equity markets on Tuesday after predicting that this was “a bear market rally because we have not yet turned the economy around”. That was echoed by Merrill Lynch’s David Rosenberg, one of the few analysts to forecast the financial crisis, who warned that “investors seem to have confused an actual recovery with the fact that the economy isn’t detonating anymore”.
Higher consumer spending and better than expected economic data have raised hopes that the recession may be near an inflection point, spurring a 22 per cent Dow Jones rally.
However, Rosenberg said that the economy had merely worked through the post-Lehman collapse and was now “transitioning back to its pre-Lehman trajectory”, a trajectory that was still negative.
For example, markets had celebrated an improvement in manufacturing-sector activity in March, he said, even though the data was still the fourth-worst reading in the past 27 years.
“It is one thing to be in a situation where the data are no longer collapsing at a 50-70 per cent annual rate and quite another for the economy to be in recovery-mode or even remotely close to recovery mode,” he said.
High-profile banking analysts Mike Mayo and Meredith Whitney were no sunnier in their outlook.
Mayo hit the headlines this week after reiterating that bank loan losses would surpass Great Depression-era levels, while Whitney recommended investors avoid bank stocks, saying that hopes of a V-shaped economic recovery were “misplaced”.
Analysts at Morgan Stanley and Société Générale this week called time on the market rally.
Bears caution that credit markets have lagged equities in the recent rally. Despite policy initiatives, the futures market for US housing prices fell in recent weeks and is indicating that house prices will not bottom until mid-2010, or 50 per cent lower than peak prices.
Similarly, the US Treasury’s announcement that it was looking to buy up to $1 trillion of mortgage-backed toxic assets has failed to prevent the ABX index, which measures subprime mortgage market conditions, hitting new lows.
Company chief executives, meanwhile, are far from bullish at present. The Business Roundtable survey, which polls a group of chief executives of major US corporations, this week found that executive confidence is at its lowest level in seven years.
Twice as many executives predicted that sales, investment and employment would drop over the next six months, while the number cutting payrolls in the coming quarter is 10 times greater than the number hiring.
The treacherous economic environment has resulted in corporate defaults hitting their highest monthly number since the Great Depression. Some 7 per cent of speculative-grade companies defaulted in March, Moodys said, adding that the global default rate would surge to 14.6 per cent by year’s end. European defaults are forecast to be higher still, peaking at 21 per cent in the fourth quarter.
Given this background, it’s likely that the market upturn is a “classical 20 per cent-plus bear market rallies on the hopes of successful policy action”, Morgan Stanley cautioned.
Between 1930 and 1932, five such rallies occurred, with an average duration of 35 days.
Technical data bolsters the bears’ case. Some 80 per cent of US stocks were trading above their 50-day moving average at the beginning of this week.
Over the past 18 months, market rallies have continually faltered after reaching this technically overbought state. Retail sentiment surveys, meanwhile, show a recent surge in bullishness and are “close to the levels that kyboshed the last bear market rally” in January, David Rosenberg said.
Of course, an over-bought technical state will not prevent further gains if a strong economic recovery really is under way.
Martin Feldstein, as chief executive of the National Bureau of Economic Research (NBER), is given the task of officially determining the start and end dates of US recessions.
Unfortunately, he doesn’t yet see the green shoots of recovery.
“I see no firm basis for predicting when the economy will begin a sustained increase,” Feldstein said. “I believe it won’t be in 2009. Sometime in 2010 is possible, but is still no more than a hope.”
