Sometimes a good graph can be worth a thousand words. I am grateful to Robert Buckland of Citigroup for this helpful illustration of stock market behaviour after the largest market falls of the last 30 years. This shows in his words how equity markets typically move through a phase of strong recovery in the 12 months after a market plunge (the “equity surge”) to a period of more consolidation or gradual improvement (the “equity grind”).
Of course this time it could be different, and if you care to follow the warnings of Professor Nouriel Roubini and others, we could be in for a further gruesome period for equities as a double dip recession in developed countries starts to bite. However there is a reason why the phrase “this time it’s different” was described by Sir John Templeton as the four most dangerous words in investment. It is that believing the adage will often lead you to a dangerous conclusion. (Pedants might say it is five words, but that is another matter).
There is no doubt that the technical position of the equity market has deteriorated in recent weeks. Earnings upgrades, as noted earlier, are starting to run out of steam. There is certainly no shortage of negative news around. But that does not mean that equity markets cannot move higher over the balance of the year and that I still suspect is what they will do. In the short term equity markets look oversold, and many professionals I rate highly tell me they are finding bargains at current levels. That won’t make the pace of equity market recovery any faster, but it does provide a measure of comfort.
