Jeremy Warner: How sustainable is the stock market bounce?
Friday 17 April 2009
Outlook There may or may not be a rapid bounce back in the economy, but the stock market, which tends to discount some way into the future, already seems to have made up its mind and is celebrating as if spring has already fully sprung. Since its low point in early March, the FTSE 100 share index has leapt 15 per cent, led by the banking sector, which has risen by an astonishing 55 per cent. This was admittedly from an extraordinarily low point, but even so, it's quite a rally.
Scarcely less impressive has been the bounce back in retailing stocks. The turning point here was the Marks & Spencer trading update, which was much better than generally anticipated. This may have had more to do with clever management of expectations than underlying commercial realities. Companies still get some sort of a kick from ambushing stock market pundits with better-than-anticipated news.
Just as things are never quite as good as people say they are in the good times, they tend not to be quite as bad as the analysts say in the bad times either. Markets always overshoot, on the upside and the downside. In the bear market of the past year and a half, equities simply became cheap and undervalued. It is that realisation, more than the expectation of imminent recovery in the economy, which underpins the recent bounce in share prices.
How sustained this bounce might prove is still anyone's guess. Opinion is divided roughly equally between those who dismiss it as a sucker's rally in a continuing bear market and those who think it the start of a new bull market. Yet quite a number of respectable voices, including Anthony Bolton of Fidelity, Warren Buffett and now Crispen Odey, have added themselves to the latter category. Pretty soon they will have created a movement, and once that happens, it tends to become self-fulfilling.
The latest sign of things being on the mend in the banking sector comes from JP Morgan Chase. As with Goldman Sachs earlier this week, first-quarter figures were much better than anticipated. Record levels of revenue from fixed income raise legitimate questions over the sustainability of these earnings as the full force of conventional bad-debt experience resulting from the recession starts to hit home.
Even so, things are plainly not quite as bad in the banking halls of America as is generally assumed. Jamie Dimon, the chairman, yesterday declared himself the latest banking boss determined to repay his Tarp money as soon as the authorities allow it. He also said he couldn't understand why Goldman Sachs needed to raise new capital from the markets to fund Tarp repayment, the implication being that JP Morgan would not have to do the same.
In any case, the stock market is beginning to feel a lot safer than it was. The return of stock market confidence is an essential precursor to an eventual recovery in the economy.
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