Jeremy Warner's Outlook: Stock markets will eventually turn but we haven't seen the capitulation yet

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London's FTSE 100 index briefly dipped into official bear market territory yesterday – defined as 20 per cent or more off the peak – and though it later came out of it again, few would bet on stocks staying out of trouble for long.

Hank Paulson's prediction that the US economy will be pulling out of the downturn by year end was tempered by the observation that economic conditions would remain difficult for some years to come. In Britain, it is still possible we'll avoid outright recession but nobody is forecasting a swift bounce back.

The US Treasury Secretary is only preaching what has become conventional wisdom in predicting a long, hard slog. Meanwhile, the doomsters, or perma-bears, no longer seem as far out on a limb as they used to. Some of their predictions are coming true, and their warnings of a prolonged economic contraction now find a ready audience in stock markets.

One way of looking at the current downswing in equities is not as the relatively recent phenomenon you would imagine, but as part of a prolonged bear market which stretches from the bursting of the technology bubble at the turn of the century. The FTSE 100 is no higher today than it was ten years ago, as those once looking forward to a healthy pension know to their cost.

In the intervening period, there's been a bust and then a renewed boom, but it is possible that policy action taken to mitigate the last bust only succeeded in delaying the necessary workout. Certainly, the Anglo-Saxon world seems to have been living beyond its means over the past five years. The hangover is now a doubly serious one. Corporate profits, the outlook for which is the ultimate determinant of stock market value, are now taking a hammering as past excesses come home to roost. Yet bear markets don't last forever, and whereas there is potential for stocks to go a lot lower yet, eventually many of the prices we see today will look cheap. When fear is the dominant psychology, as it is now, cash becomes king. Some day, greed will reassert itself, but the debt overhang has to be allowed its workout first.