Excuses and fear could keep markets down

Steve Sedgwick
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HOW many times since October have you heard the words, “I think the equity market has run up too fast and I’m waiting for a correction before I commit money”? The answer is lots, of course.

Second question: how many of these people will be committing money to the market now we’ve seen a bit of a correction? The answer is not many.

Welcome to the wall of worry and the lemming-like nature of the herd. There are some really smart equity market players out there who have outperformed wonderfully since the turnaround in these markets, but they are in the minority.

The FTSE 100 is still up 16 per cent from 4 October, when it was 4,944. Last week the Footsie closed at 5,723, having fallen just over four per cent from its 2012 high.

All in all we’ve had a great run. It’s not quite as impressive as the 34 per cent uptick we’ve seen in the Dax since its September lows, but then UK stocks never fell as far on the way down.

So for all those who said they would buy the equity market once they saw a correction but are now finding new excuses, what’s keeping them in not-so-yummy yielding cash and gilts? Lots of things, which on the surface are as worrying as ever.

Last week, we saw yet more evidence of the failure of Europe to create any semblance of growth. From Spanish employment and auctions to European PMIs and auto data the picture was sadly familiar. In fact, the prop that had come from the US also fell away with payroll numbers that were distinctly underwhelming.

On the corporate front, there is a persistent school of thought that says we’ve seen peak earnings on both sides of the Atlantic. Many analysts are concerned that the divergence in equity market performance and earnings expectations has gone way too far since October and needs a serious correction. That said, estimates have been scythed so much that there is a hope we will get some nice surprises in the season that starts officially again today with Alcoa.

We’re hardly being ebullient in forecasting low single digit growth in earnings in the S&P for the first quarter. This time last year we got nearly 20 per cent growth. So what are the reasons to buy? Goldman Sachs thinks we should embrace a “long good buy” for equities based on valuations compared with government bonds and the fact that we may all just be a tad too pessimistic in our economic projections.

There’s also the hope of easy money to help prop up equities. This has been a key part of the Eurozone’s “more constructive policy effort”, says Brewin Dolphin’s chief strategist Mike Lenhoff. He says this, along with a steady look to the US economy and developing world growth, means equities remain supported.

These various cases could leave us in equilibrium for a large part of 2012 and give us a prolonged, low volume sideways move in the market. A bit of a yawn if that proved to be the case, but at least it will buy time for the herd to line up their excuses when they fail to capture the next big move when it eventually comes.

Steve Sedgwick is an anchor at CNBC