Is the market about to roll over?
Worrying times for equity investors as stockmarkets take a tumble; the FTSE 100 was down 2.3% today (14.01.15). Weakness had already been evident with deflationary fears, spurred on by a falling oil price and gilt yields going ever lower, hurting confidence. The price of copper fell 10% this morning but the catalyst for the bigger sell off today seems to have been news that US Retail sales fell in December. This certainly is of concern to us since the case for equities is mainly predicated on a recovering US economy pulling the rest of the world with it.
US Retail sales fell by 0.9% in December and November’s increase was revised down from 0.7% to 0.4%. Possibly the impact of one month’s disappointing sales would not have been so great if the market hadn’t already been nervous. At any rate it would be surprising if the momentum in the US economy evident from December’s job figures had run out of steam so quickly. The bullish case is that it may indeed take time for the impact of lower energy prices to feed through to increasing the real incomes of consumers.
The graph below shows the weekly performance of the FTSE All Share since the end of August. It has been a frustrating period!
The FTSE All Share closed today at 3447.5. Is there a possibility the market might roll over completely and fall through the 3370 mark? I suspect chartists, of which I am not one, would say that that would be a very bearish signal. Clearly, there is a danger that the real or perceived threat of deflation so shakes confidence that such fears become self-fulfilling. This is the most worrying aspect of the falling market.
However, we still think the more probable outcome is that the US recovery does continue and low inflation adds to consumer buying power, aiding the process of economic growth. We don’t think now is the right time to be selling equities, therefore. We should nonetheless expect a rather bumpy ride.