get ready for the next leg down ...minack

  1. 298 Posts.
    He says that basically that we have had earnings downgrades in financials
    But no recession leads to a drop in just one sector
    You usually have eanings falling in the whole economy.
    so financials now commodities next I'd say

    read on

    Happy hiatus
    By Gerard Minack

    PORTFOLIO POINT: A next leg down in the sharemarket will be caused by broad-based earnings disappointment.

    I expect a two-stage bear market in equities. With a relief rally under way as financial-sector concerns abate, remember that a second bear market is likely, due to US recession and global slowdown. There may now be a hiatus in selling, but I think markets will make new lows later this year.

    We have seen two-stage bear markets before. The 2000-03 bear market followed a pattern that I expect to see repeated in this cycle.

    Exhibit 1 shows the S&P 500 split between the information technology sector and the rest of the market. The technology sector started to crumble after the market peaked in March 2000. However, by September the S&P 500 was back almost at its high (1521 on September 1, versus the 1527 on March 24). By May 2001, the IT sector had fallen by 55%, but the rest of the S&P 500 was above its 2000 high. In other words, the first 15 months of the bear market were an IT-only affair.

    Then, as the recession intensified, the rest of the market cratered, exacerbated by accounting scandals. Although the IT sector kept falling, the big story of the 15 months following May 2001 was the bear market in the non-IT sectors, which fell by 35%.

    Just as the 2000 bear market started as an IT-only affair, so far the current bear market has been centred on financials. Exhibit 2 shows a three-way split of the S&P since the start of 2007. There has been the bear market in financials, an ongoing bull market in the most global sectors (materials and energy), and a flat performance in the rest of the market (which, to be fair, masks wide performance range, from weak sectors such as homebuilders and consumer discretionary to the strong industrial export sectors).

    Remember an obvious point: Recessions are bad for earnings. There has never been a recession where earnings have not fallen. Earnings are falling now, but that decline is concentrated in financials (Exhibit 3).

    Now look at what the sell-side consensus is expecting for non-financial earnings: 25% earnings growth over 2008-09 (Exhibit 4). As I've noted before, if there is a recession, earnings will more likely fall by 25% than rise by 25%. There remains huge downside risk to earnings forecasts should a recession unfold.

    This is not just a US risk. Leading indicators are pointing to earnings risk globally (Exhibit 5).

    The important point about all this is that the next leg down in equities, if it comes, will likely not be a return of the financial-focused bear market of the past six months. It will be a bear market caused by the broad-based earnings disappointment always seen in recession.

    Gerard Minack is chief market strategist of Morgan Stanley Australia.
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