David Morris
MOST global equity markets are struggling to make headway following the sharp sell-off at the beginning of the month. Investors are shying away from stocks on concerns that valuations are looking stretched, and as a number of tailwinds which had previously offered support are now fading. In the US, the first quarter earnings season is drawing to a close. With over 90 per cent of S&P 500 companies having reported, 69 per cent beat analysts’ earnings estimates, according to Thomson Reuters. This was down on the fourth quarter, and there were certainly notable misses, including Google, Disney and Bank of America. But overall, investors saw the numbers as positive, and largely ignored any downbeat forward guidance, believing that corporations still have room to cut costs. This is debatable, but if so, then it would point to further job cutting and additional downside pressure on employment.

This is a problem. While the latest US non-farm payroll number came in better-than-expected, the unemployment rate ticked back up to 9 per cent last month. Weekly jobless claims have begun to trend higher, rising back above the 400,000 threshold for the fifth week in a row. Housing is still weak. While there was a bounce in home sales data last month, this came off very depressed levels, and the overall trend has turned down again, as shown by the S&P/Case Shiller House Price index. Meanwhile, the foreclosure scandal is ongoing which is curbing activity and preventing the housing market from finding its true clearing level.

But perhaps the biggest concern for investors is what happens to asset prices once the Federal Reserve completes its latest asset purchase programme. Back in August, Ben Bernanke announced that the Fed would purchase up to $600bn of US treasuries. Ever since, the dollar has slumped while equities, oil, precious metals and other commodities have all soared. There are now just six weeks left before the second round of quantitative easing comes to an end, and currently little likelihood of a fresh replacement programme. Traders are now preparing themselves for the loss of a huge amount of liquidity which was leveraged up and hosed into risky and high yielding financial instruments. We’ve already seen steep falls in the dollar, oil and precious metals. Investors are hoping that equities won’t be next.