Don’t be fooled by global stock stumble

August 17, 2009

Don’t blame global stock markets for being skittish. It is August, after all, a month that has spelled trouble in the past two years.

Recall that, a year ago, Fannie Mae and Freddie Mac started wobbling at the precipice while AIG, desperate for cash, began paying junk-like yields in the corporate bond market. A month later, all hell broke loose.

In August 2007, a shutdown in short-term lending markets forced global policy makers to rush in with a flood of liquidity to keep the lifeblood of the financial system from clotting.

So it’s only natural that, this year, sellers are trigger-happy at the slightest whiff of trouble.

Problems surfaced in the United States last week, when a double-whammy of soft retail sales followed by a drop in consumer sentiment reignited worries that for all the good cheer about an emerging recovery, the exhausted American shopper is still unfit to carry the economy.

These concerns carried over into Monday trading in Asia, where they mingled with homegrown worries. In China, a drop-off in direct foreign investment helped fuel a nearly 6 percent decline in the Shanghai stock index and concerns about the Japanese economy helped trim more than 3 percent from the Nikkei.

U.S. stock indices have followed suit, with the S&P 500 off 2.43 percent and the Dow Jones Industrial Average off 2 percent.

Monday was an ugly day, but investors should try to rein in their anxiety about what it means for such big-picture questions as what shape the economic recovery will take. That’s because a battle between bulls and bears, which typically emerges at economic turning points, has taken hold of financial markets — meaning today’s worries about the global economy are likely to morph into tomorrow’s worries about too much stimulus creating dangerous asset bubbles.

It’s a constant tension and one that will continue to push and pull financial markets for some time to come.

“The markets have very selectively reacted to economic data,” says Stephen Stanley, chief economist at RBS. Little more than a week ago, for example, the S&P 500 hit a 10-month high after the U.S. reported “only” 247,000 workers were dropped from payrolls in July.

Given the big run up in risky assets like stocks and corporate debt since March, and last week’s data, it’s not surprising that investors are now worried that the rosier outlooks failed to take into account the growing fixation of the U.S. consumer on savings.

Take price-earnings ratios. Bespoke Investment Group noted last week that the P/E ratio of companies in the S&P 500 climbed to its highest peak since 2004, as earnings failed to keep pace with the optimism that fueled a 50 percent jump in the S&P 500 stock index since March. For earnings to catch up, the consumer will have to shake off worries about high unemployment rates and pitch in with good old-fashioned shopping. So far, that’s looking like a stretch.

So, chalk up the stock declines to correcting what had become overbought conditions and get ready for more choppiness ahead.

This is the messy reality of turning points, not necessarily the foreshadowing of something truly ugly to come. Even if it is August.


We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see

“This is the messy reality of turning points, not necessarily the foreshadowing of something truly ugly to come. Even if it is August.”

Yeah, right…  /week-in-charts-buckle-heck-up.html

Posted by Denis | Report as abusive

Wishful thinking I’m afraid. The rally is a fool’s rally. It’s only an effect of the disconnect between U.S. monetary policy and U.S. domestic economic activity. The increase in the USD money supply has resulted in inflation in asset values without alleviating the underlying deflation in prices for goods and services in the U.S. domestic economy. The disconnect is not surprising when you consider that U.S. monetary policy effectively operates as the monetary policy for a large part of the world that peg their currencies to the USD, notably China. Any increase in the USD money supply will dissipate into all these economies. Banks and investors benefitting from the Fed’s quantitative easing measures will invest their newly printed cash in parts of the ‘dollar area’ where they see the greatest profit potential, emerging Asia. In other words, the Fed is stimulating the Chinese real economy. The result is a bubble… Once it pops, dollars will flow back into Treasurys.

Posted by Ian | Report as abusive

howx boss awar you good becaus I write fo you

It is a very silly article. The real economy of the United States had been destroyed. Financial speculations will not bring it back. Short-term fluctuations of the stock market, investor and consumer sentiments and other stuff alike is irrelevant: we are fundamentally screwed up. Until you see re-industrialization of the United States, there will be continuous, permanent decline of this country to the third-world level. Collapse of the US dollar is the next step.

Posted by Gregst | Report as abusive

It is unfortunate that the web gives us this “license” to be rude and insulting while we supposedly express our views or a contrary view to that of another person while we hide behind pseudonyms that give us some false sense of coward’s courage.

Thank you Agnes for writing this piece, even though some do not (apparently) entirely agree.

I suppose that time will prove us all wrong, in some regard.

Posted by george plhak | Report as abusive

Too many analysts and commentators completely overlook the fundamental result of the latest recssion: P/E Ratio was stable, but they were based on over-leveraged gains – these gains ARE NOT sustainable whatsoever once the excessive leverage is reigned in. Period. Full stop. So bull market or not, for stock valuations to approach the pre-crisis highs must be fueled by excessive leverage, i.e. anothr bubble. Quite frankly, given that the public now have a taste for saving again and don’t trust corporate America worth a damn, I’d expect profits to shrink even from current levels for at least the next five years. The gov’t or Fed can print all the paper they want, it will only delay the inevitable. And only once these bubble cycles are out of the way can REAL growth of industry occur, and with that will come R&D dollars and a true recovery. Anything without this resetting of the bar is just another bubble in the waiting.

I’m sure many won’t agree with me, but I think that all TBTF corps should be nationalized immediately and broken up into smaller entities. After that point, no more gov’t intervention should be tolerated as far as who gets bailed out and who goes belly-up. That will also do wonders in resetting the bar. It will be painful and i some cases investors in these corps will get the shaft, but if it’s between people with excess to invest or the taxpayer, I’m inclined to let the people who went in with eyes open pay up next time ’round.

Posted by the Shah | Report as abusive

I have to respectfully disagree with the author. It is a mistake to confuse a short term appreciation of the stock market as an indicator of improving economic conditions. Currently in the NYSE some 60-70% of trading activity is high frequency trading, not institutional investors who represent “real” investors. When the few HFT firms decide to exit, prices may collapse. In addition, insiders have been selling heavily the past few weeks. The few “positive” signs in fundamental economic data is short lived stimulus spending with borrowed money that is not sustainable because the credit bubble of the last 35 years is dead.

If you check the Federal Reserve website, private credit is still collapsing. What we have seen in the past six months is a global mini-bubble in asset prices, specifically the stock and commodities markets, as many Central banks have joined the very dangerous ZIRP party, not just Japan and the U.S. Favored banks are using taxpayer money to temporarily pump up their own stock prices to raise money. In fact, even China has shown concern that a significant portion of its 600 billion stimulus has gone to asset speculation. There will be no recovery in the real economy until bad debt is allowed to default. Every G7 nation is making the same mistake, trying to prop up bad debt in order to maintain the power and wealth of the ruling elites, and to jump-start the dead private credit markets to wishfully return to the good old bubble days.

Posted by Michael | Report as abusive

Thhis has been a long time coming. The feds kept cutting interest back when the correction should have taken place. Years ago both scums (dems,consv ) preached that nafta would keep us alive in the world economy, They said it would be great for the American consumer. We all see now that all our industries are posted over seas and has any products gotten cheaper for us like we were told? DUH! hell no just more profit for the company owners and executives. The only thing that is thriving in this country now is illegal immigration which is another burden killing this economy. Yet you will never hear a single polotitian comment on this problem. Here we go people, wait 10 minutes and you will be living in a third world country. Better learn the other languages now. What a lame government this has become. TOTALLY SUCKS!!!! but hey, have a great day.

Posted by Jimmy | Report as abusive

The best way to avoid a depression is to never declare one. The government is just blowing alot of money on senseless projects. The latest stimulus package has been stimulating the all the wrong people. Cash for clunkers, what a joke! Heaven help us all, we are in for a bumpy ride.

Posted by rain | Report as abusive

All one hears from pundits is gloom and doom. Same old prognostications each time the USA has an economic downturn. Of course the economic downturn will run its course and all the gloomy predictions will be forgotten. It should not be forgotten that the downturn of 1929 did not end until the govt. spent massive amounts of money preparing for WW2. A belated Keynesian pump priming if you will. The current downturn has brought on asset deflation that shows no sign of abatting in the near term. Cheap money is gone and with it consumer buying power. For sure the standard of living for the av. U.S. family will decline….at least for the near term if not the long term. However the trend is not all bad. Americans are saving more. Prices are falling. U.S. export goods are becoming more competitive. The natural corrective actions of the market place are working as they should.

Posted by Paul | Report as abusive

Absolute rubbish!

Posted by Betty | Report as abusive

People of God: Come out of her and that ye be not partakers of her sins, and that ye receive not of her plagues

Posted by timlight | Report as abusive

Good analysis. Really, were it not for all the other noise this would be a ho-hum type of correction. With the noise from the credit/bond/unemployment/pickacouplemore mess it looks like the world is coming to an end. Again. Prices got ahead of earning. People were astounded to discover the apocalypse hadn’t happened so they overbought.

I’ve been watching the SPY P/E for a couple of weeks wondering when a correction would start. Could be month or more before things get back on track. Commercial real estate is going to have some bad news to contribute. I sold off my REITs last week, and spent Friday and Monday feeling very clever. I’m not some great financial guru by the way. The last couple of issues of the Economist have laid this out pretty simply.

Posted by ARJTurgot | Report as abusive

I responded to Ms. Crane’s arguments on my blog.

Feel free to read it here: sponse-to-agnes-crane-on-reuters.html

In short, I disagree with her argument and I find it to be rather poorly supported.

Stocks tumble because some people are worried, which makes them yet more worried. Capitalism’s major drawback is that it rests on the worriers’ propensity to inflict suffering upon themselves, and in turn upon others –who refuse to live from fear to fear. There should be one system for the worriers and another for the rest.

Posted by paul | Report as abusive

As OptionPundit says, the bull and bears are in the hindsight. We will come to know if this was a minor pull back before bull resume their march or a significant one that lured lot of retail investors into it giving false impression on “green sh**ts”. Whether it was light at the end of tunnel or another locomotive. alysis/stock-markets-the-game-is-full-on

In the article above optionpundit has provided some key areas that one may watch out for hinting what kind of pullback, if any, if we are to observe.

You don’t know what you don’t know; and there are so many things in the downturn that are not so normal and hence making a judgment that bears have run their course may turn out to be a mistake…but again, that’s also in the hindsight

Posted by manesh | Report as abusive

one thing i am sure of , that the markets need to take a breather before it starts a new leg of upmove, and if taking a breather means loosing 10-15% from the top, than so be it.
addrsing IAN, who calls this a fools rally, than let me remind you my freind, that allmost doubling from the bottom can still be called a fools rally, than i truely wonder waht a real rally would be like:))

Posted by kalpit | Report as abusive

A company with a PE ratio of 18 when financing is practically free on the short-term – i.e. 1.5 percent from commercial paper – is fundamentally different from a company with a PE ratio of 18 when rates are on the long-term – maybe 8.5 percent from long-term bonds. To say that things look normal tells the investment community that this person really regards their intelligence with absolute contempt. It delegitimizes the substance of an article to focus on the tangential and peripheral while ignoring the central and obvious.

Accept the fact that in this multi-generational ponzi scheme, those holding the assets at the end will not be permitted to unload to the general public. These communists running the government who think they can burden tax-payers to help companies unload from the ponzi scheme should also get a reality check. Because average people just plain don’t have the money. It’s like a wealthy banker trying to rob a homeless person to pay for a new car. The government has prolonged this recession by boot-licking every special interest and distorting the relationship between risk and reward.

Posted by Don | Report as abusive

Where exactly is the long term growth coming from in order to keep this market rally going? As the economies of the US and others begin to come out of the recent acute credit crisis the chronic one begins as finacial stimuli are necessarily reversed. That means we are all looking at tighter money supply and higher interest rates for some years to come. These are not ideal conditions for businesses to show sustained profits with cashflow to match, which hardly augurs well for investment. Another black Monday is far more likely.

Always there will be bear and bull views on the market but anytime such as now when you see a blitz in another direction when nothing notable has changed we should be able to tell things are being highly manipulated. After whatever is accomplished from the current phase we will be blitzed at some point with everything is looking like it’s starting to get better and yet again it will work just like magic. I’ve missed the money I could have made on this one by overestimating people.

Posted by Bob | Report as abusive

If you consider Bespoke Investment Group’s P/E calculations you should also take a deeper look at how they calculate that P/E in the first place. They have a P/E of about 10 around March 2009, when it never reached there. Please check your sources before citing them. -p-500-p-e-ratio-nearly-doubles#comment- 631716

Posted by John | Report as abusive

Thanks agnes..I like your commitment towards green shoots. However I do believe that something ‘truly ugly’ will come about before oct( latest).

At that time this article could be used to show how wrong MSM is :-)

Posted by d&b | Report as abusive

yeah, free cars and houses for everyone. america is number one! Obama will destroy the bears, HOPE at last!

Posted by dvictr | Report as abusive

As an 80-year-old I have strong memories of the Great Depression. That makes the current economic problems seem like little more than a minor pimple on Dame Fortune’s nose. As FDR put it: We have nothing to fear except fear itself.

I love how the thing that all the economists and fatcat usurers want is for the “average” consumer they screw over on a daily basis, to start spending more of our money on useless crap to prop up production.

Posted by moose | Report as abusive

I don’t think the problem is sellers being “trigger-happy at the slightest sign of trouble” this year. The problem is the absence of investors and the presence of a plethora of people –undoubtedly including all those laid-off investment bankers– acting like day-traders. Meanwhile the SEC acts like tweaking a few rules will make the market fit for actual investors to use.

Even what should be “corrections” don’t amount to that, since the day-traders drive the prices back up (and then back down a little) within a few days or a week. By saying “day-traders” I mean to include the professional high frequency traders. There is no longer any pretense on Wall Street of a fundamentals-based rationale for trade, although some of the business oriented media play along with that game and try to attribute swings to this or that “reason.”

Stocks that used to have low volatility now have betas above 1. Stocks that used to have betas hovering above 1 now have them at 2-something. The term itself –indeed, the term “volatile stock”– has lost meaning. Anything is fair game for shorting, for options play or for arcane involvement in hedging one absurd position with another equally absurd one. And everything is subject to high frequency trading that makes a mockery of an individual’s considered offer to buy or sell.

Whoever believes any of the proposed “reasons” for market behavior of late really should stay out of the market. It’s the big casino, baby. Period. The only difference is that no one can be entirely sure who owns the place, but it’s still true that you can’t beat the house in the long run. What you can bank on is that this time around it won’t be the investment banks holding the hot potatoes, since there are no longer any institutions worthy of that name. Why anyone would trust the investment advisory functions of an entity that also trades for its own account (using high-end computers and HFT algorithms) is beyond my comprehension in these apparently post-ethical times.

The stat worth keeping an eye on is the number of bank failures. It’s rising, but at a rate that’s so far still slow enough not to bother the proverbial frog in the cookpot. That frog is us, the ordinary investor. We’re more than halfway to cooked and don’t know it yet.

Posted by Liz R | Report as abusive

Problems surfaced in the United States last week, when a double-whammy of soft retail sales followed by a drop in consumer sentiment reignited worries that for all the good cheer about an emerging recovery, the exhausted American shopper is still unfit to carry the economy.
The rally was going too strong for that to have affected it without a coordinated media blitz saying it might do so. Curiously enough that market manipulation was right before options expiration week.

Posted by Bob F. | Report as abusive