Santa Claus rally is encouraging but the economy is still the Grinch, says Crossbridge Capital’s Manish Singh
It is important to remain wary of talk about a possible turnaround in global markets, suggests Manish Singh at Crossbridge Capital, who gives his predictions for asset classes through 2012.
Last year was marked by Europe’s repeated failure to address its sovereign debt crisis but the final quarter of the year saw stronger growth in the US and improvements in housing, employment and manufacturing. This fuelled an 11% rally in the S&P 500 in Q4 and the liquidity measures put in place by the European Central Bank (ECB) fed further into the impending year-end ‘Santa Claus’ rally. To think that we are out of the deep hole would be a mistake; inaction on the part of European authorities would dig us deeper. My prevailing sentiments are cautious, but not outrightly bearish.
The gain for the S&P 500 in 2011 was a meagre -0.003% (the S&P 500 opened at 1257.64 and closed a year later at 1257.60, with 246 stocks ending the year lower and 254 higher), supplying the second lowest return in history. The flat finish belies the volatility we experienced (+8.9% and -14.6% at the peak and the trough respectively). More importantly while the index went nowhere, the EPS (earnings per share) rose 16% in 2011 to a record 97$. With the S&P now trading at a multiple of thirteen times, it definitely looks cheap – relative to historic levels.
As debt migrated from the private to the public sector, growth has shrunk and refinancing costs have increased. It’s going to be a slow recovery process and austerity alone is not the solution, as uber-austerity prescribers in Europe now realise. Just like eating spinach for breakfast, lunch and dinner is no sensible prescription, a diet of austerity alone is not a cure for excess debt. Any measure that ignores promoting and supporting growth will make things worse and prolong the crisis, and hence the recovery.
For Europe, Q1 is critical: no more quibbling and incompetence is allowed. Apparently, two months after the collapse of Lehman Brothers in 2008, a small group of European leaders set up a secret task force, one so secret, that they dubbed it “the group that doesn’t exist.” Its mission was to devise a plan to head off a default by a country in the Eurozone. Seriously? A full two years in preparation and given the response so far, maybe they should have called themselves ‘the plan that doesn’t exist’. I rather wish Ethan Hunt was offered this mission. How bad could he do? Not much worse.