There was more blood letting yesterday as markets continued
their slide downhill. Emerging markets led the way, with the Indian stock market
dropping by 10% before it was suspended. Brazil and Russia suffered big losses too,
while in London the FTSE 100 fell to its lowest level since last December. In
comparison, losses in the US were quite subdued. One of the ironies of the current market
slide is that the US has not suffered so badly, but concerns about the US economy are
largely what is fuelling the crisis.
Now, attention is focusing on how much longer the declining market will continue.
Are we in the midst of a full blown crash, or is this a market correction?
First a contrary view. It could be argued that we are still in the midst of a much
bigger crash - one that kicked off at the beginning of this decade. Amongst all the
euphoria during April, in which markets broke five-year highs, it was often forgotten that
we were still below the peaks seen at the tail end of the previous decade and the beginning of this. The Dow Jones
got to within a couple of hundred points of its all time high, but the FTSE 100 was
languishing well below the giddy heights it once reached. As for the NASDAQ - it was as
far below the heights it reached before the dot com crash, as a mountain climber is below
the mountain he plans to ascend, before leaving base camp.
History sees the stock market crash of 1929 as catastrophic because losses were not
fully recovered until the mid ’50s. In fact, the bear run lasted for almost 30 years.
Perhaps the question is whether the recent highs are temporary, and not the other way round
Setting aside this ultra pessimistic argument, let’s look at the reason for the falls.
Fears that the massive US Balance of Trade deficit would eventually unravel are not
new. Search Google and you’ll unearth articles dating back to the ’90s that detail Uncle
Sam’s vulnerability, and warn that sooner or later the world will pay for the excesses of
the US consumer. In recent months, these fears have gained momentum. With American
shoppers apparently taking a break, the global economy needs Eurozone and Japanese
consumers to take up the slack - but alas, their track record is not good
Then there are fears over inflation. With commodity prices so high, the fear is that
inflation will rise, forcing rates to go up. Only time will tell if these are fears are well
founded, but inflation remains muted at present.
Some argue that the FTSE 100’s recent poor performance, in comparison with US
markets, is because the UK has more mining stocks, and it is these that are pulling us
down. Yet, over the last month, Health Care has been the worst performing sector.
We do know a few things about the long term prognosis. China and India, et al will
continue to grow. Any recent fall in stock markets in emerging countries is surely a
correction, a sign of an exciting market growing a little too fast.
But, with western markets, its less clear cut. There are no signs of the silly season in which company
valuations reach dizzying heights, which has traditionally heralded previous crashes.
But it would appear that the US consumer, who has for so long bailed out the global
economy, is satiated, and few can have faith that the European consumer will take up the
reins.
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