The World Economic Forum

Bull Continues to Run Backwards, World Economy in Shambles!

Stock markets managed to close last week in the black, but with the FTSE trading in a 700 point range and the Dow a 1600 point range, it was anything but a quiet week. The state of the Financial Markets still maintained centre stage, but attention has now started to shift to the wider economy. Unfortunately sentiment is no better there and it would be fair to say the state of the world economy is hardly grounds for optimism. The now deeply wounded financial sector was arguably a significant catalyst for the above average stock market returns seen since the mid 90’s. The leveraged buy outs and easy credit fuelled buying across many asset classes. Many are now speculating that it could be decades before we again see bull markets of the calibre of the last 20 years.A recovery is of course not out of the question, but the sustained, aggressive buying we have seen since the ‘big bang’ may be a thing of the past.

After the groundbreaking part nationalisation plans from the UK government, it was a mixed week for UK banks. Leading financials may now be safer than they have been for some time, but a large proportion of the share price of any company is expectations for future growth and dividends. That future growth now looks to be severely limited for many reasons. It was reported that Lloyds TSB was lobbying to be able to pay its shareholders dividends. With much of the sentiment and credit worthiness of a financial shares tied to their share price, it is little wonder that UK banks are keen to be able to maintain a dividend payment of sorts. UK banks have hardly moved upwards since the announced bail out plan, not least because the plan cut off the income element that had attracted many to invest in the banks over the last few year.

With the focus of market participants being almost entirely on the disasters in the financial sector, the dramatic reversal in energy prices has been easy to miss. Since peaking in July of this year, crude prices have halved to $70 a barrel. While this is good news for consumers, it may actually be bad news for major stock markets in the near term. Energy firms such as Exxon Mobil and BP make up a significant proportion of their respected indices so their rapid declines with falling oil prices have weighed heavily on markets such as the FTSE. Since the start of October, the S&P 500 has moved in almost perfect tandem with oil prices.

Energy prices have fallen with commodities as the former global boom turns to a global slow down. Mining stocks such as Kazakhmys were the biggest fallers last week. Even China’s once double digit pace of growth has now slowed, curbing demands for raw materials and energy. The Baltic dry freight index, a bell weather for Global Trade, is down by 75% since May 2008. The question is no longer whether the US, UK, or parts of the Eurozone with go into Recession, but how deep that recession might be.

Many are drawing parallels between the recent turmoil and the great depression era around 1930. It is interesting to note that the last time the Dow Jones dropped by 7.5% or more three times in a single month was 1929. Then, as now there were big falls followed by snap rallies, followed by further selling. Anyone thinking that this couldn’t get any worse might want to take a look at the performance of the Dow after it recovered off the 1929 November lows. After rallying to 300 over then next 6 months, the Dow subsequently rolled over and dropped a massive 84% to 50. While this may not happen this time, it is worth considering that a fall of this magnitude has happened before.

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Total World Economy Collapse

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