How Much Worse Will It Get?
Stock markets seem to be staring into an abyss. What are they telling us about the economic outlook?
If tabloids cared less about Big Brother rejects and teenage knife crime, the big splash might have read "Mirror Shock Profits Meltdown". Shares in the paper's publisher, Trinity Mirror, suffered a record fall on news that earnings would come in below expectations.
It's going to be a very, very tough summer for everybody in newspapers, but the really grim news is how badly companies in virtually every other sector (barring mining and energy) are being clobbered: housing, banking, retail, even nursing homes, for goodness sake. No wonder the carpet magnate Lord Harris of Peckham claims the country faces its toughest year for half a century.
The situation is no better across the Atlantic, where Wall Street has endured its worst June since 1930. The old adage of "sell in May and go away" would certainly have been the best investment strategy this year, though that doesn't come close to describing the almost all-pervading sense of gloom. Analogies with the Great Depression are flowing thick and fast.
I don't believe we are going back to a Thirties environment with people living in tents, yet there are growing numbers of homeless Americans now living in their cars. The big concern is mounting evidence, from corporate profit warnings and bankruptcies, that problems in the finance and housing markets have spread to other sectors, reinforcing the negative spiral: There is a possibility that a faltering economy damages the financial system, which weakens the economy further. Unfortunately, we are in an economic environment where we have more to fear than fear itself.
The immediate question, as the second half of this annus horribilis begins, is why the stock market has suddenly joined almost all other financial markets and headed south. For all the talk of global depression, equities were – until recently – the "dog that hadn't barked".
There are lots of familiar culprits: the impact of inflationary fears on interest rates, the oil price, continuing financial sector weakness, malaise in the housing market... The worrying conclusion, however, is that this latest fall is a product of all these factors and more. The stock market, unlike some asset categories, is primarily a forward indicator and investors have simply decided that the mild, restrained optimism they have been clinging to for the past year is no longer justified.
They may have just decided to sell and go away. And not just in May.
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