That’s the view of Morgan Stanley’s Teun Draaisma, who reckons the much feared tightening is about to begin in earnest.
The trigger according to the strategist will be a strong US payroll reading on Friday and a change in Federal Reserve language at its meeting later this month.
As stimulus is withdrawn from the system equity markets will struggle just like they did in 1994 and 2004.
The recent rally was larger than we expected, and in our eyes was due to: 1) there have been no positive payrolls or Fed language change yet (we even saw some loosening rather than tightening measures last week, with the Greek bailout, the ECB keeping its wide collateral pool for longer and the Obama plan for troubled mortgage borrowers); and 2) sentiment had turned quite cautious in early February. Nevertheless, we do think the market peak associated with the start of tightening is near, and expect 2010 to show a volatile whipsaw pattern in equities.
Previously, Draaisma’s thinking had been to take advantage of this dip to buy. Now, he is less sure.
The first cyclical bull market within the ongoing secular bear market was 2003-07, the current second cyclical bull market started in March 2009 and should continue until the next earnings recession. Our earnings growth leading indicator (EGLI) points to over 50% earnings growth in the next 12 months, and we expect earnings growth of 35 per cent and 10 per cent in 2010 and 2011 (versus IBES consensus expectations of 33 per cent and 23 per cent, respectively). Equity valuations are reasonable. We prefer equities over fixed income on a 12-18 month view. This does not represent a change of view, but it is a change in our choice of wording.
As for the next earnings recession, Draaisma reckons it is a couple of years away.
We believe the secular bear market is incomplete for a variety of reasons, including that banking crises and bailouts tend to precede debt crises; that the amount of debt has not been reduced yet (it only changed hands to the government); that equity valuations never reached end of bear market levels; and our historical analysis that equities tend to struggle for longer in the aftermath of secular bear markets. When the next earnings recession hits, perhaps in 2012, we expect equities to complete the bear market that started in 2000.
Which all sounds very much like Albert Edwards’ Ice Age thesis – i.e. this bear market will only be over once valuations have reached the levels of previous bear markets.
And in case you are wondering what they might be, the following charts provide a clue.
Related link:
Devaluing the yuan – FT Alphaville
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