All the doom and gloom that’s in the air makes me worried that the stock market could be facing impending collapse.
For example, the Chancellor of the Exchequer peppered his recent budget speech with warnings about economic headwinds and the governor of the Bank of England was saying weeks ago that economic conditions ahead look worse to him than many seem to expect. On top of that, China’s economic growth is slowing and company outlook statements, such as Next’s recently, suggest that 2016 looks set to be as tough for trading as 2008.
It could be priced-in
Yet negative sentiment about the macro economy has been prevalent for so long now that reduced expectations could be priced-into the stock market’s overall valuation.
As convincing as the ‘big’ commentators sound, I can’t help but feel that they might be behind the curve. The real leading indicator of conditions ahead is probably the stock market itself. If there are economic headwinds blowing up, you can bet your last pound that the markets saw it coming first.
Look at the share prices of the major banks. They’ve been flatlining for the last couple of years or so. Commodity prices and the share prices of commodity firms have been sliding for at least that long as well, and other cyclical sectors have been weak. The plunge in the supermarket sector is the icing on the cake. I think it’s all evidence that the stock market figured out long ago what Mr Osborne and Mr Carney have been talking about more recently.
A long sell-off seems unlikely
If anything, the sharp plunge in stock markets at the beginning of 2016 looks more like a blow-off bottom than the start of some horrendous bear market. After a long period of momentum in either direction, we often see this final blast when things might be about to change, whether that’s in individual share prices, commodities or stock market indices.
Trading may well be softer for many firms during 2016, but not so much that they can’t turn a decent profit, I reckon. Public and personal finances seem in pretty good shape. Banks are financially stronger now than at the time of last decade’s financial crisis. Monetary policy is loose. Conditions just seem wrong for a big market sell-off now.
The long climb
Banks, Supermarkets, commodity firms and other cyclicals have all corrected and could boost the general stock market’s performance going forward. With share and commodity prices so much lower in the cyclical industries, there’s a good chance that upside potential at least balances any further downside risk. Meanwhile, it’s a well-known aphorism that stock markets climb a wall of worry.
Scoping back to the larger picture, the financial crisis was a big hole to fall into, so it seems logical that the crawl out of it will be a long one. Putting it all together, a multi-year bull market may be imminent.