One swallow does not a summer make
Investors would do well to remember Aristotle's adage...
A quick ring round the trading community in both the UK and Europe has revealed a distinct improvement in sentiment regarding market performances of late and hopes for the future, although the word "optimism" is oft preceded by the word "cautious".
“Bullish!” one European trader dared to state, while his counterparts mostly opted for a slightly less vigorous proclamation. Still, with the FTSE 100 index having gained almost 10% over the last eight trading sessions and the sun shining on much of Europe, it is hard to deny that something has changed. Whether this change is the start of a market recovery or is simply a bear market rally is the crux of the matter.
The predominant answer in the investment community has been “bear market rally” of late, but conversations this morning with a number of industry participants has resulted in a slightly more sanguine response. “The message we received from market behaviour last week was about as encouraging as we could reasonably have hoped for,” a strategy analyst at a leading European brokerage said. Noting that the recent rally has been led by the financial sector, the analyst said there becomes a point when the option to invest in banking shares becomes attractive again even in an insolvent financial system. In fact, he added that his interpretation of last week’s market moves suggests this point has been reached and that markets will now stage a recovery.
Such a recovery, however, is not going to be characterised by a V-shape—on that all observers seem to agree—but is rather more likely to simulate the shape of a widely-stretch U. One analyst sees an overall European market rally in the region of 20-30% between March and early summer and even dared to imply he favours the top end of this estimate, but before you get over-excited, he is still assuming that total returns from pan-European benchmarks will be close to zero at the year's end.
Yesterday’s markedly-better-than-expected housing starts data from the US was pounced upon by many as a sign things are indeed turning around, but several traders this morning highlighted their caution. “Some people feel the housing numbers from the States may be an early bullish sign, but I think it’s too early to say,” a London-based trader said this morning. “We have had a good rally on buyers dropping money in on a fall but I think more proof is needed,” he added, pointing to sterling as a key indicator to watch for signs of a turnaround.
As if to prove his point, in the time it has taken me to write this synopsis of market sentiment, official figures have been released showing UK unemployment is now at its highest level for 12 years after an alarming increase over the last month. Predictably, the UK’s leading index has responded by falling into the red, currently 1.3% lower at 3,806.27. However, a sign that investors remain hopeful is the FTSE 250 index’s reaction: the mid-cap market is often considered to be a more accurate reflection of the economy as a whole and at last check it was not higher but also hadn’t fallen either, trading perfectly unchanged at 6,211.8.
Another trader based on the Continent highlighted investors’ concern this morning. “Clients are very, very cautious,” he said, “and currently only like to invest in more ‘secure’ stocks such as Reed Elsevier, Unilever and Royal Dutch Shell.”
It’s certainly tempting to get a little carried away after so many months of doom and gloom, but the general feeling on the floor is that investors should hold on to their horses. A cautious investor is more likely to be a happy investor—at least in terms of stress levels if not profitability—and so the lesson to be learnt from today’s dialogue with the trading community is to go forth prudently and be sure to be wary of over-zealous cries for bullish activity.
