In fact, it's made me even more bearish of the market for one simple reason.
The current economic conditions, and far more importantly the potential economic conditions, are far worse than they were back in 2002/2003 when the All Share index bottomed around 1685. The index is currently trading around 2730.
Let's look at just a few of the main problems right now -
- The banking sector is on life support (whether it admits it or not)
- Inflation is out of control
- The housing market is starting to panic
- Unemployment is picking up
- Wages are stagnating
- Sales are cratering
- Consumer confidence is at a 34 year low
- Government tax receipts are imploding (don't discount this one)
- And above all the man on the street is financially tapped out
Add all of those ingredients together and I still think the UK stockmarket remains in denial. The only thing that seems to be keeping the stockmarket alive is hope but as the old saying goes - hope in the markets is nothing but a 4 letter word.
According to the FTSE All Share the UK market at the time of writing is down 18% on the year and down 22% from its 2007 peak of 3479.
The low of 2003 is 1685 and if it gets down there it will have retraced, from the 2007 high, of just over 50%.
Simple Economic Analysis Normally Works Best
Yes, the following is simple analysis I admit, but ask yourself if the current economic conditions, and more importantly the likely economic conditions of the next 6-12 months are worse than they were around 2000 - 2003?
If you believe so then the lows of 2003 based on the FTSE All Share looks a sensible place for the market to fall to. We rode the wave all the way up, now I believe it's a good bet that we ride it all the way back down.
Warning - Don't Forget 'Plan B'
In last month's newsletter I discussed 'Plan B'.
Plan B tries to take care of the unexpected, a potential stockmarket rally. And why might this happen? Because again simple economics suggests the market should be a lot lower than it is. This in turn means the market might be showing what I refer to as hidden strength.
Hidden strength means that as the market has not fallen by as much as it should have done, it could be setting itself up for one hell of a rally.
Although if there were to be a rally I can't see it happening until much later in the year or early 2009.
If the market were to rally then chances are it wouldn't make a V bottom (straight down and then straight up). More likely there would be a churning phase of up and down movement where it builds a lateral base.
I'm not expecting this but at the same time I'm keeping an eye open because in this game the strange and unexpected events are the ones we have to watch out for.
Read more about my arguments on hidden strength in last month's newsletter.
Summary
Markets thrive on confidence but without it prices are only ever one day away from being crushed, which in turn leads to further downward legs in the bear market. This is the current stockmarket climate.
Sure, many continue to try to call an end to the problems but clearly, and especially in the all-important banking sector, there are still major structural faults which cannot and will not be sorted out any time soon.
Take Merrill Lynch (MER) as a classic example. Its market capitalisation is around $24 billion but over the last 6 months or so it's had to raise $30 billion in new capital. And every step of the way its management has been telling us that each new slug of money is the last, the one that gets the bank back on its feet again.
So what's the betting that Merrill's and probably every other bank will continue to raise fresh capital? Would you currently bet against this because I wouldn't.
The banking sector was the driver of the stockmarket and general asset boom since 2001. So as long as that sector remains in trouble it's going to be almost impossible for the general market to gain confidence?
Stock investors should take note and I believe prepare for more problems throughout the rest of the year.
