Yesterday was another ugly day for stocks, with bourses around the globe falling victim to strong selling pressure. Fueling the sell-off were concerns that the economic recession could not only be deeper and longer than previously feared, but also fall into a corrosive deflationary phase.
The MSCI World Index and the MSCI Emerging Markets Index fell by 4.6% and 2.2% respectively, tallying declines of 51.2% and 63.4% since the peaks of these indices in October 2007. Only the Chinese Shanghai Composite Index (+6.0%) and the Russian Trading System Index (+0.7%) bucked yesterday’s declines.
Click here or on the thumbnail below for a (very red) market map, obtained from Finviz, providing a quick overview of the performance of global stock markets (as reflected by the movements of ADR stocks).
As far as the US markets are concerned, the Dow Jones Industrial Index (-5.1%) plunged below the roundophobia 8,000 level, resulting in all the major indices now trading below the recent lows of October 10 and 27. This brings the lows of 2003 (Dow 7,524; S&P 500 801) and 2002 (Dow 7,286; S&P 500 777) into sight. A breach of these levels – frightfully close to the current levels of the Dow (7,997) and S&P 500 (807) – will wipe out the entire five-year bull market from 2002 to 2007.
Interestingly, only 2.4% of the 500 S&P 500 stocks now trade above their 200-day moving averages. This line is often used as a crude indicator of the primary trend of a market or individual stocks. The graph undeniably shows an extremely oversold situation, but bear markets have been known to stay oversold much longer than usual.
One can argue long and hard about valuation levels and earnings forecasts, but the extent to which stocks become undervalued in the grip of this bear is squarely in the hand of the severity of the economic meltdown. This is clearly shown by the relationship between the Dow Jones World Index and the Baltic Dry Index – an assessment of the price of moving the major raw materials, including coal, iron ore and grain, by sea and generally an excellent barometer of economic activity.
The worrisome prospects for economic and earnings growth, together with the threat of deflation, are spooking the financial markets. The extreme level of risk aversion is illustrated by the US three-month Treasury Bill rate falling to a minuscule 0.065% – a clear sign of distress and fear – and the yields on long-dated government bonds falling significantly in most parts of the world.
Here is what Richard Russell (Dow Theory Letters) – one of the few market commentators with first-hand experience of the Great Depression – has to say: “The market is warning of a coming depression. Next year there’ll be a huge problem of unemployment, job openings will have disappeared, and every business will be going over its personal thinking in terms of who the business can do without.
“The sentiment in the country will be dark grey to jet black. Fortunes will have been wiped out. Thousands of savings plans and 401Ks will have been shattered. Americans who have never experienced true hard times will be living hard times. Confusion and fear will be rampant. How do I know all this? I’ve been here before, I know the signs.”
Oversold conditions have so far not produced more than a temporary reprieve, and nobody knows how far down this bear market will fall. Until we see more signs of base formations being developed, one should tread very cautiously. And remember the old Boy Scout adage: “Be prepared”.
June 24, 2008 - Courtesy of Bespoke Investment Group - The recent selloff in equities has really spared no one. As shown in our trading range charts below of 22 major country indices, the trend has been down across the board in recent weeks. Even Brazil, Mexico and Russia, who had all held up relatively well this year, have sold off quite a bit. Currently, 19 of the 22 countries are trading in oversold territory (Canada, Japan and Russia are neutral). European countries like France, Germany and Italy have really taken it on the chin, while China and India remain the biggest losers in 2008. After forming short-term uptrends off of the March lows, global equity markets have now lost most of their gains and are looking to move back into downtrends.
April 7, 2008 - Courtesy of Bespoke Investment Group - As shown in the table and charts below, the trailing and forward P/E ratios of the S&P 500 and Nasdaq are high compared to the valuations of other markets in other countries. While it has historically had high valuations, the Nasdaq’s current trailing and forward P/E ranks highest among 12 other country indices, including China’s Shanghai Composite. The S&P 500’s trailing 12-month P/E ranks 3rd, although it is in the middle of the pack when looking at forward estimates. The lowest P/Es are currently in Europe. Valuations in the US are higher because earnings haven’t slowed as much in foreign markets and price declines in the US have been less extreme, even though we’re the root cause of the global market selloff.
Apr. 2, 2008 - Courtesy: Bespoke Investment Group - The Baltic Dry Index measures changes in the cost to transport raw materials such as metals, grains and fossil fuels by sea. Many look to the Baltic Dry Index as a leading indicator, and in recent years, its move has been fairly correlated with China’s economy and the Shanghai Composite.
As shown in the chart below, China’s equity market and the Baltic Dry Index had huge rallies from the end of 2005 to the end of 2007. They also had huge declines after they peaked late last year. Since late January, however, the Baltic Dry Index has been climbing while China’s Shanghai Composite has been falling. This divergence suggests that China’s equity markets might be getting a little overdone on the downside at least in the short term.
Byron R. Wien, Chief Investment Strategist of Pequot Capital Management, Inc., today issued his list of Ten Surprises for 2009. Mr. Wien has issued his economic, financial market and political surprises annually since 1986. The 2009 list follows:
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