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Market commentary February 2012

By February 8, 2012No Comments

SUMMARY. The markets have had a decent rally since the lows last October, spurred by vast money-printing by the world’s central banks. But recent history suggests it is no more than another giant sticking plaster, midst some very complex problems.
PS the latest TopFunds Guide is just printed (and in the post today if you already asked a for a copy). If you haven’t yet requested one, do email now.

The markets have had a decent rally since the lows last October.  The FTSE 100 has advanced 14% (though still below where it was this time last year), and this has been mirrored by mainstream stock markets around the globe. Co-ordinated action by the world’s central banks has been the key – a flood of newly printed bank notes (more usually called quantitative easing, or QE).

In “the old days” (1980-2005) injections of liquidity (printing money) and low interest rates would lay the foundation for the next cyclical recovery. So it always made sense to buy the market ahead of that upswing. 

The problem now, midst years of debt reduction and austerity, is that cycles are much shorter, truncated.  And the old medicine doesn’t work in the same way anymore.

For example, when the US first went down this path (2009 with so-called QE1), the hope was that giving money to the banks would create a chain reaction and spur the US economy as a whole.  QE1 did stop the 2008/9 crisis becoming even worse. But it didn’t jolt their economy into a self-sustaining recovery (in the style of 1980-2005).  The wealthy got a bit wealthier as their stock market recovered, but there was little or no benefit to what has become known as “the 99%”.  In addition, this money printing encouraged speculation in commodities, pushing inflation up and making it even tougher for the 99%.

This time last year the markets were riding high based on QE2.  That certainly didn’t last.

Now we’re midst a market recovery from the lows of last Autumn due to the most recent, huge, money printing operations. But be clear: this action was first and foremost intended to prevent a global financial collapse late in 2011, and to that extent it has certainly succeeded. Yet this success is primarily in buying time, and we simply don’t know how much time. 

In the latest TopFunds Guide we look at the three pillars of the global economy in more detail (EU, US, China), and if you take a longer view everything isn’t bad. Equally, don’t get over-optimistic in the short term.

For example, subtle signs of weakness lie behind the recent positive headlines on US GDP growth, which were up 2.8% (annualised).  Inventory rebuilding was responsible for 1.9% of this number.  Unless rip roaring demand emerges in this first quarter to diminish these inventories (it won’t) this means economic growth will necessarily be somewhat weaker in the next quarter or two in the US.

And for all the talk of a US consumer revival, consumer spending was losing momentum in the final quarter.  Such revival as there had been was largely based on a drawing down of savings – illustrating admirable enthusiasm to spend by US consumers, but necessarily limited. 

So of the three pillars of the global economy, the US bounce from last Summer is already faltering, China remains anybody’s guess, though a slowdown of some degree is undisputed, and then there’s the EU.  Much of Europe is already in recession, France is shaky, and though Germany is a holdout so far, it is difficult to see how they can prevent themselves being dragged down.  And that is without another crisis unfolding. At the time of writing we observe that while many now appear relaxed about the possibility of a Greece default, we don’t believe the continuing complexity and scale of the eurozone crisis is well understood

If you feel compelled to dip a toe in into the water, drip-feeding over a period remains the best strategy for most.

Dennehy Wealth