Nothing to fear but over-optimism itself
Values have shrunken to fantastic levels; taxes have risen; our ability to pay has fallen; government of all kinds is faced by serious curtailment of income; the means of exchange are frozen in the currents of trade; the withered leaves of industrial enterprise lie on every side.”
The above quote comes not from one of the multitude of modern commentators but from Franklin D Roosevelt’s inaugural address in 1933. We’ve spent much of the last year-and-a-half looking at the parallels between the Great Depression crisis of the 1930s and the present one. But while Roosevelt tried to boost confidence in the US by remarking in that same speech that “the only thing we have to fear is fear itself”, I can’t help fearing that the opposite may be true this time around and that we are just a little too confident.
The question is clear. Have we cast aside inconvenient valuation criteria which rudely question the logic of piling money into the market at these levels? As we get near to closing the book on 2009, markets have taken it upon themselves to not just erase the pain of the March lows but also to forge ahead with trough to peak gains of around 50 per cent for the FTSE, 60 per cent for the Dow and over 70 per cent for the Nasdaq.
I ask the bulls the same questions I asked in the early days of this decade when the tech bubble had yet to fully burst. On what criteria can we justify these heights? Back then they pointed me towards earnings before interest, tax, depreciation and amortisation (ebitda) and other such measures that strip out enough negatives to paint a lovely valuation picture. Now I’m told that trailing price to earnings rations (p/es) are too backward looking.
Surely it’s the forward PEs that count, they tell me.
So are the analysts suitably cautious after such a rally from March? Are they conscious of the fact we now have years of high unemployment, massive public sector deficits ahead?
Looking at early calls for 2010, bullishness appears to be the norm. Goldman expects DJ Stoxx pre-exceptional net income to grow by 38 per cent. UBS said the S&P will rally to 1,250 by the end of 2010 and ING has raised next year’s Stoxx 600 target to 310. The great and the good of the investment community know far more than I, but when everyone seems to be saying the same thing I start to get a little nervous that we might have missed something. Sure, we appear to be over the worst and companies are less debt-ridden, leaner animals – but for how long can the equity markets trade on forward expectations? Sooner or later in 2010 we’re going to need to see real top line growth or the whole confidence game may be up. Perhaps we have nothing to fear but over-optimism itself?
Steve Sedgwick is a presenter on Squawk Box Europe weekday mornings on CNBC.