State Street Investor Confidence Commentary
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In markets as horrible as these, clutching at straws can seem like an act of rationality rather than desperation. However, those wishing to read too much into a 3 point rise in this month's Investor Confidence Index are whistling in the dark. As any seasoned commentator will remind you, even dead cats bounce.
This particular expired feline has barely managed an involuntary twitch. This month's reading of 68.8 is still lower than any other recorded, with the one exception being December's nadir. The time series of the index includes such episodes at the Russian debt default and collapse of Long Term Capital Management in 1998, the pricking of the TMT bubble and subsequent bear market in 2000, and the 2001 US recession and September 11th terrorist attacks on New York and Washington.
After this month's feeble recovery, the ICI has still fallen 31 percent since August. That is still further and faster than most stock markets. The FTSE100 and S&P500 indices are still to retreat 20 percent from their recent peaks, though the Nikkei 225, Australia All Ordinaries, Singapore Straits Times and Hang Seng are among those that are now officially mired in a bear market.
Even this meager recovery in confidence could yet prove still-born. Falling stock markets at some point offer a buying opportunity. Meantime, policymakers have been desperately trying to play catch up with events. Fed chairman Bernanke has made it explicitly clear that more rate cuts, whatever is necessary, are coming. 75 basis points is just the start. President Bush has tried to pump prime the economy with a $180 billion shot of adrenaline. Even steely European monetarists on the ECB governing council have been offering soothing words. Yet, both words and actions have fallen on stony ground.
Flows continue to offer a relentlessly negative signal. In the most recent weeks developed market flows have actually deteriorated. Those hoping that December's gloom merely reflected an unwillingness to take risk ahead of the year end have been proved wrong. There has been no reallocation to equity markets in January. The stocks institutional investors are buying are in classically defensive sectors, such as Utilities and Consumer Staples. Sectors which are cyclically sensitive continue to be sold, with Materials and Industrials to the fore.
Of course, for most institutional investors performance is still a relative game. Even in a bear market they have to take positions and are paid to beat the market. The fact that they are choosing to play that game by buying the safest assets available shows the pervasiveness of fear. Beyond equities, risk aversion is also writ large. The current bout of fear has seen institutional investors establish a concurrent long position in both the Japanese yen and Swiss franc for the first time since 2005.
The small twitch upward in confidence might represent a pinprick of light. However, the journey from this dark tunnel of despond will be long, treacherous and not for the faint-hearted. Perhaps the most optimistic note is the resilience of European confidence. The theory that the rest of the world can decouple from a US economic slowdown has taken some hard knocks of late. But European investors have so far kept the faith. They will need more positive news to stay the course.
Andrew Capon
State Street Global Markets
After this month's feeble recovery, the ICI has still fallen 31 percent since August. That is still further and faster than most stock markets. The FTSE100 and S&P500 indices are still to retreat 20 percent from their recent peaks, though the Nikkei 225, Australia All Ordinaries, Singapore Straits Times and Hang Seng are among those that are now officially mired in a bear market.
Even this meager recovery in confidence could yet prove still-born. Falling stock markets at some point offer a buying opportunity. Meantime, policymakers have been desperately trying to play catch up with events. Fed chairman Bernanke has made it explicitly clear that more rate cuts, whatever is necessary, are coming. 75 basis points is just the start. President Bush has tried to pump prime the economy with a $180 billion shot of adrenaline. Even steely European monetarists on the ECB governing council have been offering soothing words. Yet, both words and actions have fallen on stony ground.
Flows continue to offer a relentlessly negative signal. In the most recent weeks developed market flows have actually deteriorated. Those hoping that December's gloom merely reflected an unwillingness to take risk ahead of the year end have been proved wrong. There has been no reallocation to equity markets in January. The stocks institutional investors are buying are in classically defensive sectors, such as Utilities and Consumer Staples. Sectors which are cyclically sensitive continue to be sold, with Materials and Industrials to the fore.
Of course, for most institutional investors performance is still a relative game. Even in a bear market they have to take positions and are paid to beat the market. The fact that they are choosing to play that game by buying the safest assets available shows the pervasiveness of fear. Beyond equities, risk aversion is also writ large. The current bout of fear has seen institutional investors establish a concurrent long position in both the Japanese yen and Swiss franc for the first time since 2005.
The small twitch upward in confidence might represent a pinprick of light. However, the journey from this dark tunnel of despond will be long, treacherous and not for the faint-hearted. Perhaps the most optimistic note is the resilience of European confidence. The theory that the rest of the world can decouple from a US economic slowdown has taken some hard knocks of late. But European investors have so far kept the faith. They will need more positive news to stay the course.
Andrew Capon
State Street Global Markets
