Hardened investors need to pause

Hardened investors need to pause
Tags: commentary Quest Means Business Richard Quest

Written by Richard Quest
Wednesday, 29 July 2009 23:05


HAVE you ever watched a lady walking down the street on very high-heeled shoes that are clearly beyond her abilities? The tottering; the ungainly sway; the break of a spike; the twist of an ankle, and possibly a crashing fall to the floor.

The stock market in recent weeks has been behaving in just such a fashion. Rising from its March low, the S&P 500 is now 44% higher than its lows of early March. The DJ Euro Stoxx 50 has gained 42%.

This rise has taken place while we are still getting horrible numbers showing economies still in recession and unemployment rising. For instance, last week the UK government announced the economy contracted by 0.8% in the second quarter, leading to a 5.6% fall for the year, and yet the FTSE rose 7%!

The market is baffling sedulous investors seeking reasons for the gains, especially while economists continue to offer dark warnings about the future.

I could offer you many reasons to try and explain what is going on. Some will find comfort in the latest earnings reports from major companies.

Analysis by Bloomberg shows 75% of the S&P 500 companies that have reported so far have surpassed expectations. Others will remind me that markets are a leading indicator lighting the way forward, not some rear view mirror like gross domestic product (GDP) or jobless numbers.

And there are those who will delve into the bag of tricks used by technical analysts such as chartists to explain the inexplicable.

None of these reasons make good sense when you put them into the real world where companies are still cutting back.

On my programme Quest Means Business, we do our own analysis of the earnings season with the Q25. This isn't a scientific index!

We take 25 of the biggest companies across a broad range of industries and debate whether they receive red or green marks for their earnings, asking simply “did they meet or beat expectation?”

When we looked closely we saw a lot of window dressing making numbers look rosy. Core revenues were still weak; outlook and guidance were often poor or non-existent. Overall, we got the feeling many companies were just about getting by in horrible trading conditions.

In the end we gave 13 green and 12 red, hardly an endorsement justifying a 40% rise in share prices.

To those readers hoping I am going to square this circle, you will be disappointed. I do, however, have a theory, and it goes like this: Investors are naturally optimistic beasts.

They are driven by looking up the mountain to the next peak, only noticing falls once they have begun. After recent months they have become hardened to further falls. So the market has taken the horse called Optimism and ridden the blighter for all it is worth.

Unfortunately, no one really knows if this is doomed to fail under an ambush of further bad news.

In the end, we have to hope that the markets continue to behave like the young lady in her new, high-heeled shoes.

Upon wearing them, she may totter terrified out of the shop — but it isn't long before experience and confidence take over.

Soon, our lady in heels is negotiating concrete and carpet alike with escalators thrown in. What we need now is that same experience in our investing, which probably means having a pause to allow experience to set in.

Richard Quest is a CNN correspondent based in London, host of the weekday one-hour programme Quest Means Business.

Source: The Edge