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Prieur Perspective: Was Rally Too Much, Too Soon?


Dismal reports have investors reassessing risk.

A long-awaited reversal in the monumental global stock-market rally since early March finally arrived last week. As the first-quarter earnings season started winding down and post-stress-test capital-raising weighed on some banks, investors were faced with a slew of gloomy economic reports suggesting the recent optimism about a global recovery might have been premature.

"This week, the hard economic data remind us that the global recession is ongoing: exports remain deep in the red; retail sales disappoint; inflation gets a small energy bump but is still down; and industrial production declines. However, the data are consistent with the story of a slowing economic decline, foretold by several 'green shoot' survey reports," said Rebecca Wilder (News N Economics).

"Less bad" economic reports provided investors with little comfort, sparking a reassessment of their risk appetite, and leading to profit-taking on most bourses. Also, commodities retreated after recording 4-month highs earlier in the week, and high-yield corporate bonds and emerging-market currencies came off the boil. On the other hand, safe-haven assets such as government bonds, gold bullion, the US dollar and Japanese yen attracted buying. Investment-grade corporate bonds and Treasury inflation-protected securities also closed the week in positive territory.

The performance of the major asset classes is summarized by the chart below.

Click to enlarge

After 9 straight weeks of gains, global stock markets succumbed to profit-taking last week with the MSCI World Index falling by 3.4% (YTD +0.1%) and the MSCI Emerging Markets Index down by 2.4% (YTD +24.8%).

Similarly, the major US indices reversed course. The NASDAQ Composite Index (-3.4%, YTD +6.5%) and the Russell 2000 Index (-7.0%, YTD -4.7%) declined after rising for 9 consecutive weeks and the Dow Jones Industrial Index (-3.6%, YTD -5.8%) and the S&P 500 Index ( 5.0%, YTD -2.3%) fell after being up 8 out of 9 weeks.

After last week's sell-off the NASDAQ is the only major US index still in the black for the year to date, finding itself in the company of the majority of emerging and mature markets.

Click to enlarge

Returns around the world ranged from top performers Serbia (+10.0%), Cyprus (+9.7%), Bermuda (+9.5%), Namibia (+8.5%) and Vietnam (+6.5%) to Romania (-12.2%), the Czech Republic (-8.3%), Finland (-6.9%), Luxembourg (-6.9%) and Indonesia (-6.0%) which experienced headwinds. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)

China (+33.3%), one of the leading stock markets for the year to date together with Brazil (+46.7%) and Russia (+94.6%), notched up another gain (+0.5%) last week despite disappointing economic data. A revival in Chinese property transactions has been a major contributor to China's recent recovery in industrial activity. Good news for Chinese equity bulls is the close historical relationship between property sales and the performance of Chinese stocks.

Click to enlarge

With nearly all the US companies having reported first-quarter earnings, the S&P 500 saw earnings decline by 34.6% compared to the same quarter in 2008, reported Bespoke. At the start of the earnings season, a decline of 38.2% was expected. The percentage of companies lowering guidance was cut by more than half, while the percentage of companies raising guidance increased by over 70%. A tough second quarter undoubtedly still lies ahead, especially as companies won't have the advantage of non-recurring cost-cutting.
No positions in stocks mentioned.
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