July’s over for the world’s markets, and the champagne and records haven’t stopped flowing or being proclaimed.
The best month, or rather the best two to three weeks seen for years, or even decades for markets of all sizes and in every region.
In the midst of the worst recession since the Depression (as confirmed on Friday in the US with a series of figures showing this is THE biggest since records began in 1947), it seems unreal to be reporting on such a strong rebound, especially with so many of the world’s other major economies still suffering and consumers in the US, Europe and Japan reluctant to spend.
But investors are greedy for a rebound and want it, possibly driving prices to unsustainable levels, especially in the US.
There’s a solid chance that if the rebound continues this week the Standard & Poor’s 500 could regain the 1,000 point mark for the first time for a while.
It closed at just over 987 points on Friday.
But investors continue to ignore the rising failure rate among small local and regional US banks, many of them due to the continuing slump in commercial property prices, through bad loans to developers.
Subprime mortgages are still a concern, but it’s now the loans made to the developers of those subprime financed homes that are causing problems.
Five more small US banks went belly up on Friday, bringing the total number of banks to fail to 69 this year.
Twenty eight banks failed in July alone, more than in all of 2008 when 25 collapsed, but that included the largest, Washington Mutual, a $US167 billion failure, which cost regulators nothing.
President Obama had a warning on the weekend in his weekly radio and internet address.
"It will take many more months to fully dig ourselves out of a recession – a recession that we’ve now learned was even deeper than anyone thought," the president said in the address.
"And when we receive our monthly job report next week, it is likely to show that we are continuing to lose far too many jobs in this country.
"As far as I’m concerned, we will not have a recovery as long as we keep losing jobs," he said
That’s a timely reminder to investors who seem not to be thinking about where earnings growth and higher sales will come from when the present stabilisation of the economy fades and the Federal stimulus eases.
The second quarter growth figures illustrate that point.
The US economy was held aloft by the recession: higher government spending and falling imports were the drivers for the 1% annual fall in the second quarter, a better than expected figure.
But it was also one which disguised the horrible truth: American consumer spending fell 1.2% in the quarter, after rising 0.6% in the first quarter.
While business spending and spending on housing and construction improved, they were still negative.
US GDP has now fallen for four quarters in a row, hitting the low in the March quarter, which was revised lower to a decline of 6.4% from the originally reported drop of 5.5% (and much closer to the original forecast as well).
In the fourth quarter of 2008, GDP dipped at a 5.4% annual rate. The two quarters represent the biggest quarterly declines in 26 years.
Business stocks again fell, which economists say will mean a rise in this or the 4th quarter as businesses rebuild inventories.
But others cautioned, saying stocks appear to have been run down to accommodate the lower level of demand now coming from business and consumers, and they question that with unemployment rising, whether there will be a sharp rebound in demand in coming months.
These figures will be reworked to take account of consumer spending and credit figures, plus up to date current account numbers for the quarter, all of which will be released in the next couple of weeks.
They could see revisions, especially after the surprise first quarter revisions
This week sees a series of key figures and decisions in Europe, the UK, the US, Japan and Australia that will test the solidity of the latest market rebound and the thinking on where the various economies are heading.
In America,
the Dow gained around 8.8%, its best July since 1989, when it gained 9%. The S&P 500 rose 7.4%, its best July performance since 1988, when it gained 8.8%. It’s risen 46% since the lows in March.
(Both after the big crash in 1987, and ahead of the nasty recession of the early 1990s, which all market reports ignored.)
The Nasdaq was up 8% in the month, its best July since 1997, when it gained 10.5%.
Reuters said that the five month rebound in the S&P 500 from March to July was the best since 1938.
(That’s when the US economy was finally emerging from The Depression).
So far, 74% of S&P companies that have reported have beaten forecasts (which were set low in many cases because the analysts were as confused as anyone about the impact of the slump).
Since the earnings season started on July 8, the S&P has surged more than 12%.
The MSCI Asia Pacific Index rose 3.6% last week to a 10-month high of 111.88 and gave us a rise for July of 8.4%, with most of it coming from around July 10 onwards.
It was the 5th monthly rise in a row and took the rise in that period of 58% since the index bottomed at a five-year low on March 9.
Tokyo’s Nikkei Index added 1.9% on Friday, almost half of the gain of 4% for July.
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