As US earnings season continues, disappointing corporate profits are prompting questions of where the next leg of equity market appreciation will come from. With efficiency and productivity gains in America tapped-out in the near-term and with Europe and Japan showing little sign of a rebound any time soon, hope continues to emanate from China and emerging markets, but here too there are problems.
On the 25th anniversary of the crash of 1987, this all begs a question: are we in a bull market that’s begging for a correction? We don‟t believe for a moment that it will be in the form of a one-day 22.6% drop, as it was on Black Monday in October that year, and we don’t think it will necessarily be a harbinger of another great crash – the one in Tokyo several years later – but there are parallels worth exploring. Essentially, the market has run ahead of reality, namely the global economy. And while we can expect central bank support, as it was in the 1980s with the ‘Greenspan Put’, investment in a strong market with such weak under-pinning leaves us cold.
Of course, markets have a funny way of being leading indicators for the economy, not the other way around, and we may indeed find that the US fiscal cliff is vaulted and that the US powers a truly sustainable global recovery, but for the time being discretion is the better part of valour. Thus, we this week in look at stocks we’ll buy if the market correction swoons to 10% or 15%. In property we look at how rental returns may fare over the coming year. And in our recently inaugurated SMSF section we look at why corporate trustees are a very good idea, ’til death us part!
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