Just when you thought it was safe to go back into the stock market, the market heads south.
Yesterday the FTSE 100 slumped 116 points, or 2.6%. Some stocks were particularly hammered, with Punch Taverns (LSE: PUB) one of the biggest casualties, down a whopping 30% on the day.
The hot resources sector suddenly turned tepid. Rio Tinto (LSE: RIO) fell 6.9%, Xstrata (LSE: XTA) 7.1% and Lonmin (LSE: LMI) 9.8%.
The US market didn't give us any help, with the S&P 500 dropping 2.4%.
So what went wrong? It was only yesterday the economy was seemingly set for a swift recovery. The respected National Institute of Economic and Social Research had forecast that the UK economy may be at a turning point, and could even be the first industrialised economy to emerge from recession.
Oh Hell -- It's Still A Recession
It seems the market suddenly remembered we are still in recession. "Recession fears cripple stocks" screamed CNNMoney.com.
In the past month or so, the market seemed to have conveniently forgotten about the recession. But it's still there, and not going away in a hurry.
From the March 2009 bottom to the recent high, the FTSE 100 had soared 30%. The oil has more than doubled since its December 2008 lows. Other commodity prices have bounced significantly too, helping the share prices of beaten down resources stocks double or even treble.
Too Much Too Fast
Any way you look at it, the bounce has been swift and impressive. But over the past few weeks, I was just getting the feeling the market was getting a little too far ahead of itself.
First there was Five Reasons I'm Not Selling Everything, where I said "…it's probably a decent time to take some profits, particularly on some of the lower quality and/or cyclical companies in your portfolio." Punch Taverns, for example?
Then there was One Big Warning Sign, where I said "I think many of the easy gains are behind us."
Finally, in a fit of desperation, there was Six Stocks To Sell Today, where I said "The prices of some individual stocks seem to have gotten somewhat ahead of themselves."
Rough Times Ahead
I'm the first to realise one stock market wobble doesn't make a correction. I'm also the first to admit I'm a long-term bull on the stock market. But I just can't help but get the feeling we're in for a bit of a rough time in the months ahead.
Now that doesn't mean it's a time to sell up everything and go to cash. Or at least I don't think it is. That's why I'm not selling everything. But I have been selling some shares, including my entire holding in Barclays (LSE: BARC), even though I sold at a loss. But more on that tomorrow…
My thinking is you don't just get through the biggest implosion of most of the world's major banks scot-free. This is the biggest recession since The Great Depression. It can't just be over in the blink of an eye.
Slow Down Big Boy
We are going to be paying for the excesses of the past few years for many years to come. The Brown government, in tune with most major governments around the world, have been forced to spend, spend, spend in order to avoid us having an even deeper recession.
But all that spending must ease one day. All that debt must be paid back. The new government, due sometime between now and the middle of next year, will likely cut government spending and raise taxes. What effect do you think that will have on the great economic recovery?
It all adds up to, in my mind at least, a slow economic recovery. It will take longer for company profits to recover. If you think a company like house builder Barratt Developments (LSE: BDEV) is going to get back to the level of profitability it enjoyed in 2007 any time soon, think again. The same can be said about BT Group (LSE: BT-A) and Marks & Spencer (LSE: MKS), amongst others.
Great Opportunities Remain
The big question now is whether this stock market wobble is the start of a correction, or just part of the normal day to day movements of the stock market. It's impossible to know.
But whatever happens from here, there remain some great opportunities. Whilst the market has been on a tear over the past few months, some high-quality stocks have been left behind. If the market does correct from here, these quality stocks will likely be dragged lower too, giving cashed up, patient investors another once-in-a-lifetime opportunity to load up on some fantastic bargains.
Be prepared.
More on the economy and the markets:
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> Bruce Jackson does not have an interest in any of the companies mentioned in this article.
