Weekly Market Review for Week Ending 30th of March 2012
On the surface, equity markets look to have finished the quarter with a flourish. The S&P 500 has risen 12% over the year to date – the largest first quarter rise since 1988. Meanwhile the FTSE 100 is up a less impressive 3.5%, dominated as it is by its mega-cap defensives, but there has been real excitement in the smaller companies, technology and telecoms and emerging markets sectors. The Nasdaq, for example, is up almost 19%.
But the more recent trend has been downward. The FTSE 100 has lost 200 points or 3.3% since mid-March while the Hang Seng has lost a dramatic 4.7% as investors increasingly exited higher-risk markets. Partly this reflects a turnaround in economic statistics – for example, UK GDP output for the fourth quarter was revised down to a drop of 0.3%, against a previous estimate of a 0.2% fall.
Austerity measures are far from over and continue to drag on the economy. In the meantime, growth continues to be elusive. Retail spending figures for February were weak. Sales volumes fell 0.8%, which was worse than many analysts had predicted. January’s unexpectedly strong figures were also revised down.
So how should investors interpret this weakness? Is it simply that investors felt markets had run up too quickly and they needed to take a pause? Or has the market got as far as it is going to go in the short term? Certainly there have been notable pockets of strength. The S&P 500, for example, has lost just 0.5% and the figures coming out of the US get better and better.
US consumer spending rose more than expected in February, up 0.8% month on month. Also, the Thomson Reuters/University of Michigan’s final index of consumer sentiment rose to 76.2 from 75.3 last month, the highest level since February 2011. The economy is reaping the benefits of higher employment.
However, the view among many multi-managers and asset allocators is that emerging markets had moved a long way in a short time and this was troubling. The markets had seen a year’s worth of performance in just a few months and many investors recognised that extending those gains may be difficult. As a result, a number have taken profits.
Most believe equity valuations still look strong but there is a school of thought that is worried earnings may be about to decline. Current P/E ratios are based on companies running with expanding margins and this is unlikely to be sustained. There are only so many costs that can be cut.
By most measures, the market does not look expensive. However, it has come a long way in a short time and is due a pause. The easy gains were made and the market needs a catalyst to make significant progress from here.