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Friday was bad, Monday was not good, Tuesday there was a rebound and Wednesday was terrible. Maybe, by the time this column is read, the state of affairs in global markets will have improved - but even in the best case, the events of the last few days will not be quickly forgotten. Both the scope and the intensity of the price falls visited on most markets - including bourses around the world, bond markets, currencies and commodities - suggest that something significant has occurred.
But maybe not. There is a possibility that what we have witnessed these past few days is simply a severe correction to the very sharp moves that characterized most of the markets for several weeks, and in some cases months, prior to this latest lurch down. A correction of this sort was surely inevitable, most analysts warned that it would happen and now it has finally arrived. Hopefully, it also has ended. That would be the most benign explanation of what has been going on, it is also logical and it paves the way for a resumption, sooner or later, of the uptrend in equity markets that is what most people most want to occur.
However, there is no guarantee whatsoever that what we have seen is a passing storm - unpleasant while it lasts but not something that changes the environment.
The second possibility is that the seasons have changed: summer for the markets is over and autumn - "fall," to use the apposite American term - is at hand. In stock market lore, this idea is enshrined in the slogan "Sell in May and go away." Why there should be strong and consistent seasonality to stock market behavior is a subject of endless academic research, but the empirical evidence is very supportive of the idea. In the US, as in most Western markets, if you simply sold the equity index every year on April 30 and reinvested on October 30, you would do much better than if you held shares all the year round - virtually irrespective of your stock-picking skills.
Of course, like all general rules and statistical tendencies, this one is far from fool-proof. But given the sharp rises in equities over the preceding six-12 months, invoking this rule this year and exiting the market in May would be the prudent thing to do. In other words, the recent bout of sharp falls is not merely a brief and violent correction, but heralds a major bout of profit-taking, which will probably take some time while investors reorganize and redesign their portfolios.
There is, however, a third possibility which is far worse than even the autumn scenario and which, for simplicity's sake, can be termed the "winter" scenario. This is the one that has dominated the headlines over the last few days, although the amount of noise surrounding it does not mean that it is the most widely accepted. The essence of this analysis is that the party is over, not just in the equity markets, but in the American economy as a whole.
Various problems are cited - inflation is coming back, the trade deficit is unmanageable, the housing boom is turning to bust - any and all of which mean that the period of high growth in the US is over. If that is the case, the lofty prices and valuations at which equity markets have been trading, and the very positive expectations that these reflect, will all have to be "reassessed" - meaning adjusted downwards to a significant degree.
Yet, even if this third and gloomiest scenario were correct, it would not justify the sharp falls and volatility seen in the currency and commodity markets. These seem to have been much more of the "correction" sort. Furthermore, even if the American economy is heading south, it does not follow that other economies at very different stages of the economic cycle - Japan is the obvious example - must go the same way. It is, therefore, probable that the drama in the markets of the last week reflects several different trends and processes. In some markets, such as gold, there may simply have been a correction. In others, such as Germany and France, there may be a seasonal factor at work, but in others, such as the US and, ironically, the emerging markets - where the boom has fed off trends in the American financial markets - a much more fundamental change of direction may be underway. The trends that develop over the next few weeks should indicate who is in which category.
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