This week will determine whether October 2008 will go down in history as the worst month ever for the performance of equity markets around the world.
The savage bear grip on global equities has been unrelenting so far this month, with major markets plumbing multi-year lows.
To the consternation of investors, the process of markets establishing a floor after sliding more than 40 per cent already this year appears increasingly fragile.
Traders said that redemption requests from investors in mutual and hedge funds were intensifying a self-feeding wave of forced selling.
Stuart Schweitzer, global markets strategist for JPMorgan Private Bank said: “The risk of forced selling as prices fall further is the essential challenge facing the market as it makes a bottom.”
In such an environment, long-term investors, including private and corporate pension funds, are also engaged in re-balancing their holdings, compounding the pressure on underlying equity markets.
So far this year, stocks in Japan, Korea and Hong Kong have lost more than half their value. European equity markets have fallen about 45 per cent per cent, while the FTSE 100 is down nearly 40 per cent. In the US, the S&P 500 has slumped just over 40 per cent.
The pain for investors has been even greater for emerging market equities. Among the so-called Bric’s, Brazil is down 50 per cent, Russia 73 per cent, India 57 per cent and China 65 per cent.
Aside from the ongoing process of investors selling stocks to meet expected and actual redemption requests, the outlook for corporate earnings and the economy in 2009 has become a guessing game.
While the lows seen in stock markets earlier this month were sparked by concerns about the financial system, the renewed breakdown in equities over the past week was sparked by fears about the global economy and earnings.
Analysts at Société Générale say that markets in the US, Europe and UK are anticipating hefty declines in earnings that tally with past recessions. The problem with that approach, says the bank, is that “these have been very shallow affairs”.
“Thus current pricing ignores the risk that this might be a deeper, more protracted recession, as would befit the bursting of a credit bubble inducing the first US consumer debt retrenchment for a quarter of a century,” SocGen said.
Doug Peta, strategist at J&W Seligman said: “Company guidance for the fourth quarter and for 2009, to the extent that it is provided, is certain to be at best muted.”
This could set markets up for a prolonged bear market. Any corrective rallies are unlikely until a clearer signal over the economy and earnings emerges.
Anthony Conroy, head of trading at BNYConvergEx said: “There will be a bottoming process for stocks, which may take several months.”
Some economists suspect that the fourth-quarter growth rate for the US economy could be one of the weakest since 1945.
There is also a growing belief that overall household wealth has endured extreme damage since the summer months, as the slump in equity prices has compounded the pain of falling house values.
