An independent professional's take on the latest news and trends in global financial markets

More On The Great Optimists

Having mentioned grounds for optimism in the equity market in my last post, it is striking that the markets have perked up suddenly in the last 48 hours – no more than a happy coincidence, I fear, as for now the markets remain in their trading range and are merely reacting to individual items of  economic or political news that by their nature have little in the way of reliable or enduring meaning. The tug of war between inflationists and deflationists, and between double dippers and equity bulls, goes on, and most likely will do for some time.

The FTSE All Share chart, for instance, continues to trade in a band around its 200 day moving average, which itself is struggling to find a new direction. It is difficult to read anything into this lack of direction other for the moment  than that it is still consistent with either school of thought being ultimately proved right. At some point we will witness a breakout that gives a more positive clue as to where the markets are heading.

It was interesting to see the Financial Times reproducing Bill Miller‘s positive take on large cap US stocks in the paper yesterday. These comments in fact originally date back to his quarterly market commentary written more than a month ago, something I logged at the time. Bill is one of the professional investors I was referring to in the last post, and someone whose views I have followed for a long time, but I could name several others. Having performed very badly through the credit crisis, and misread  the last bear market completely, such is the way of the markets that few probably take much notice of his comments any more – which doesn’t mean he is wrong, merely out of favour.

Another is the same camp is the West Coast money manager Ken Fisher, with whom I have been corresponding for more than a decade, and who likewise underestimated the impact of the subprime crisis and remained defiantly bullish throughout the  2007-09 bear market .  True to form, he remains defiantly positive about the stock market today, insisting in his latest magazine column that fears of a double dip recession are wildly misplaced. Here is a short extract:

We still have lingering fears about a double-dip recession. That’s big and scary and hard to disprove. You would be hard pressed to cite one. (Many think 1937 qualifies, but they’re wrong. GDP grew for three straight years, and the market was up 324% since 1932.) I know you can’t find two.

Why do so many fear something that has pretty much never happened? Because we always do that early in a big bull market after a huge bear market. At some later point false fears are seen as that. At that point the rebound will But the fact is that the big global economies are intertwined. So we’re going to get another recession only if the whole world does. Now try to name two global double-dip recessions in the past century. resume.

A double-dip decline in the economy is simply inconsistent with the good news we’re getting on the corporate earnings front. As I write, 459 of the S&P 500 firms have reported second-quarter profits, with 75% exceeding expectations, 9% meeting them and only 16% falling short. I expect $82 for earnings this year (after writeoffs) on this index. At a recent 1085 the index is trading at 13 times current-year earnings. The second quarter of 2010 should be the third quarter in a row when earnings growth exceeds 30%. The last time that happened was 1983. Double-dip is not in the cards.

For a longer term perspective on why investors can afford to be positive, I also commend a longer considered piece  by James Anderson, the Chief Investment Officer of  Baillie Gifford, the venerable Scottish fund management group. It makes the case that the global financial crisis has blinded many investors, for understandable reasons, from seeing the power of longer term positive change.  You can download it here. James Anderson Rational Optimism 0610.

Written by Jonathan Davis

September 2, 2010 at 2:57 PM