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雷达卡
Queasy feeling
The equity markets are struggling in the face of slower growth and central-bank inaction
THE cavalry may not ride to the rescue this time. Equity investors have been relying on the Federal Reserve for support ever since the American central bank presaged a second round of quantitative easing (QE) last August.
In a November article for the Washington Post, Ben Bernanke, the Fed's chairman, acknowledged the impact of QE on shares, stating that "higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion." But with the current round of QE about to end, Mr Bernanke gave no hint that a third programme was on its way in a keenly awaited speech this week, acknowledging merely that "economic conditions are likely to warrant exceptionally low levels for the federal-funds rate for an extended period."
The speech was a further disappointment for global stockmarkets, which have been declining fairly steadily since early May. Indeed, the mood may have changed even earlier. "Defensive" stocks (businesses like utilities and food retailers, where consumer demand is relatively resilient) started to outperform cyclical businesses in February . That shift was probably in response to a downturn in the results of purchasing managers' surveys of business confidence. Ten-year Treasury-bond yields peaked at around the same time.
The eagle-eyed may have seen the bad news coming earlier still. The Baltic Dry Index, a measure of shipping rates and an indicator of global trade activity, started to turn down late last year.
There are two possible explanations for these signs of slowdown. The first is that this is a soft patch caused by temporary factors such as the high oil price and the disruption that followed the Japanese earthquake in March. Japanese production is now returning to normal; oil is only a little off its peak but would be expected to fall further if economic weakness continues. By itself, that might spur a rebound in activity in the second half of the year.
The alternative, less palatable thesis is that the stimulus delivered by central banks and governments since late 2008 and early 2009 is now starting to fade. The authorities are running low on ammunition, as Mr Bernanke has in effect admitted. There appears to be little political appetite for a further round of fiscal stimulus or easier monetary policy. In Europe the emphasis has shifted to fiscal austerity and the European Central Bank has started to push up interest rates.
All along this rally has been dogged by a contradiction. Equity investors have attempted to act as if this is a normal recovery but central banks have behaved as if they were still extremely worried, keeping rates at record low levels. That created two potential challenges for the bulls. Either their economic optimism would prove correct, in which case the stimulus would have to be rapidly withdrawn, or the caution of the central banks would turn out to be justified and profit forecasts would have to be revised lower.
On this point, the evidence is mixed. In America first-quarter profits generally beat expectations and forecasts for the full year were moved higher. According to HSBC, analysts are now looking for 17% earnings-per-share growth, up from 14% at the start of 2011. In Europe full-year estimates for earnings-per-share growth have started to be revised downwards, albeit to a still-high rate of 13%. Anyone relying on such estimates should be warned that analysts are normally over-optimistic and terrible at spotting turning-points.
Robust profits have been, along with Fed policy, a stout source of support for share prices. But they are linked to an increase in margins (ie, a higher share of GDP for profits than for wage-earners) that has made this a much rosier recovery for Wall Street than for Main Street. Profit margins tend to revert to the mean over the long term, in part because high returns attract new market entrants. Paul Marson of Lombard Odier, a private bank, says that "over the next five years, current elevated margins imply negative nominal net profit growth."
The American market is hardly priced for such an outcome. On the best long-term measure, the cyclically adjusted price-earnings ratio, Wall Street is trading on a valuation 43% above its long-term average, according to the website of Yale University's Robert Shiller. The bulls will have to hope that Mr Bernanke can be persuaded to change his mind.
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