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Is a crash coming?

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by Peter Switzer

Some headline-grabbing commentators, website editors or simply committed bears with glass half-full attitudes are tipping a market crash soon. But I think the C-word is far too aggressive and dramatic.

No one should be surprised if this US stock market goes off the boil as it has surged since August last year with the S&P 500 up close to 23 per cent since the most recent low of 1047.22 on 26 August.

By the way, over a similar time the best we could add was only around 10 per cent or so and you can blame the Reserve Bank’s interest rate rises for some of this lethargy, especially as it has impacted on the dollar, which brought pain to many businesses, as well as their share prices.

Earnings watch

Earnings will play a big part on how the market reacts and Goldman Sachs’s disappointing fall in profit didn’t help expectations for other US financial institutions. Goldman Sachs's fourth-quarter profit slumped 52 per cent and American Express’s net income came in at 88 cents a share when the consensus was at 96 cents.

However, Bloomberg reports that 22 of the 29 companies in the S&P 500 that reported quarterly earnings since 10 January have beaten analysts' predictions.

Meanwhile China defied doomsday merchants again with growth rising to 9.8 per cent for the December quarter, which was up from 9.6 per cent in the previous quarter.

Sure we will see tightening of monetary policy by China but it won’t create a recession there this year and the US is tipped to grow by four to five per cent if you look at the range of forecasts out there, which should also keep the global growth show on the road.

Euro debt issues

And despite Europe’s debt problems, economic growth coming out of the likes of Germany is still very promising and the low euro is actually helping Europe as the low greenback helped the Yanks.

Flipping over to the European debt problem, which I think will spook markets this year, and some good news has been reported recently.

According to an AAP report, the bailout fund for Europe’s indebted governments, which has 750 billion euros in it, has enough money to cover potential rescues of both Portugal and Spain.

"I don't want to predict now whether these countries will need money; that is not the case at the moment, they are in a position to refinance themselves on the market at the moment," Klaus Regling, head of the bailout fund, told Germany's Deutschlandfunk radio.

"But if they were to come, then there is enough money. So there is no acute need to increase the EFSF," or European Financial Stability Facility, he added.

Right now the VIX or fear index is rising and is around 18 and was as low as 15 recently, so investors are a little more jumpy right now but I expect to see some sell off in upcoming weeks, which I think will be a buying opportunity.

Rest easy

A crash will come one day but it’s not nigh based on the economics we’re seeing right now and based on the economic forecasts. The worry will be European debt concerns and if the Euro-officials aren’t lying, then we should rest easy, at least for the moment.

Remember, Goldman Sachs has predicted a 20 per cent rise for US shares this year and while they can get it wrong, it makes me happy enough to say shares will be up this year, barring a left-field event, even if 20 per cent ends up being over-the-top.

By the way, if the Goldman Sachs profit slide worries you, then note this — Morgan Stanley reported a profit, which soared 60 per cent over the same time.

Reports of an upcoming share price Armageddon are overdone.

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Published on: Friday, January 21, 2011