IT’S STILL TOO EARLY TO STOP THE STIMULUS
WE ARE two-thirds of the way through the US fourth-quarter earnings season and 74 per cent of S&P 500 firms that have already reported have beaten analysts’ estimates. A further 9 per cent were in line while 17 per cent of companies fell short. The earnings season has not been good enough so far to boost US equities and it is unlikely that the remainder will turn the situation around – investors just have too many worries at present.
For a start, last week’s January non-farm payrolls showed a nasty downward revision to December’s total and this followed a series of disappointing weekly unemployment reports. Overall, investors ended up more confused than enlightened, and uncertainty isn’t good for markets.
Weaker housing data and rising foreclosures are also causing concern, and US citizens are asking what they have gained from their government’s stimulus programmes, other than a soaring budget deficit?
Beyond the domestic situation, investors need to consider the effects of Chinese tightening, the imminent halt to the Fed’s purchases of mortgage-backed securities, Europe’s sovereign debt crisis and, to a lesser extent, the Bank of England’s decision to pause quantitative easing.
The removal of liquidity by central banks suggests that economic recovery is taking hold. But the worry is that the private sector isn’t in any fit state to fill the gaps. For this reason, policymakers are being careful to leave the way open for further stimulus.
An unprecedented amount of sovereign debt has to be sold on a regular basis by just about everybody and every economic area wants a weaker currency. The trouble is, of course, when everybody wants the same things at the same time, somebody ends up disappointed.