Why a slow car crash is the worst kind for markets
If, on the day a market is told that unemployment is the lowest it has been for 48 years and it
still falls 1.7 per cent then you have something to worry about.
And remember we are talking about a market where inflation remains reasonable on a historic basis: Keep in mind 3.9 per cent might be the lowest unemployment rate since 1974, but back then the inflation rate was 15 per cent not 5 per cent.
The point here is that it was not just another bad day – it’s a steady accumulation of bad days. We lost 30 per cent in the blink of an eye during the Covid crisis and regained it all with equal speed. The threat now is the worst sort of market – a slow car crash.
The 7 per cent loss over the calendar year to date is a story of enervating retreats. Active investors will remember the doldrums of the post-GFC period where the ASX fell 50 per cent from November 2007 in March 2009 – with three and half years of ‘sucker rallies’ in between.
We are, as always, taking the lead from Wall Street – they’ve had their tech sell-off and we have had our version – though fortunately it’s an unimportant sector in terms of market capitalisation on the ASX.
This week it’s the turn of retail stocks – Wall Street’s worst session in two years was triggered by a 25 per cent drop in Target: On the ASX, Wesfarmers (owners of Bunnings) is now at a 19-month low dropping 8 per cent Thursday. More broadly, the main catalysts behind the rout remain firmly in place: fears of higher inflation, fears of slowing consumer sentiment and the deteriorating outlook for globalisation.
For share investors the biggest threat to market sentiment is the prospect of a US recession triggered by rising rates: The writing has been on the wall for months now – but it’s only in recent days that the fear has gone mainstream with Wells Fargo chief executive Charlie Scharf warning: ‘A US recession will be hard to avoid.’
The first half of 2022 has been a succession of sucker rallies. At the same time we have not yet seen anything approaching what traders call ‘a capitulation’ or the amateur investor might describe as ‘the day of no hope’.
Bears can find support for their disposition quite easily – legendary investor Jeremy Grantham has said the market could fall by around half if it were to return to long-term settings – that is if the price earnings ratios on the S&P 500 were to ‘revert to the mean’.
Bulls can take comfort from the equally legendary Warren Buffett who does not go in for prognostications on the future. Rather he moves when prices are cheap – and he has spent $US6bn since the start of the year picking up US blue chips.
For most investors it means their share portfolios certainly don’t look like they will be doing 10 per cent total return anticipated this calendar year – perhaps 4 per cent from dividends will have to do.
Meanwhile, most super funds will be lucky to break even.
But there is invariably money to be made somewhere and it is always interesting to see which stocks rose on the day the trading screens turned red: Thursday’s outperformers included gaming tech companies – and one-time merger candidates – Aristocrat Leisure and Playtech.
JAMES KIRBY
WEALTH EDITOR