Falling bank shares could be the signal to head for safer havens.
I'm finding many respected investors and analysts are saying similar things, namely…
- The global economic recovery is going to be relatively weak.
- The easy money has already been made.
- There is a decent chance of a 10% to 20% stock market correction sometime in 2010.
- The economy is being propped up by massive government intervention, something that simply must not and cannot last.
- US property prices, the thing that started this whole recession, have not yet bottomed. Worse, there are more than a few toxic loans still lurking in banks' balance sheets, and these will come home to roost between now and 2013.
- The place to be invested now is previously out-of-favour blue chips like Cable & Wireless (LSE: CW), Reed Elsevier (LSE: REL) and National Grid (LSE: NG).
Markets On The Skids
The FTSE 100 is already on the skids, and is actually down over 3.5% so far in 2010. The past week in particular has not been kind to investors, as banks like Barclays (LSE: BARC) and Royal Bank of Scotland (LSE: RBS) and commodity stocks like Tullow Oil (LSE: TLW) and Kazakhmys (LSE: KAZ) have all taken a decent haircut.
"This is certainly the biggest test the market has faced since the correction we saw in June 2009," said Jonathan Jackson of Killik & Co. on Bloomberg.
"We're dealing with the uncertainties surrounding not only the banking sector but also exit strategies from stimulus packages around the world. Markets have surged relentlessly higher over the last year and a pause for breath at some point was inevitable."
Short Memories
But the thing is, many people have forgotten share markets go down as well as up. They've been lured into a false sense of security by the market's massive rise since the March 2009 bottom.
So when markets fall for a few days, like they've been doing recently, investors start to panic. They question themselves. They wonder whether they should sell everything now, before it's too late. They consider switching from equities to bonds or gilts.
"The macro picture for the UK doesn't look particularly buoyant, stocks are down and sentiment is turning in favour of bonds," said Orlando Green of Calyon on Bloomberg.
Well hello?
Could someone explain to me when, over the last 18 months, the macro picture did look particularly buoyant for the UK?
Beats me.
The Harsh Reality Of 2010
Still, markets work in far different ways to economies. They go up during recessions, as we saw last year, and often go down or sideways during recoveries.
Welcome to the harsh and boring reality of 2010. You can forget your 1,000%+ returns on trash stocks like Pendragon (LSE: PDG) and Avis Europe (LSE: AVE). That's not to say there aren't some big winners out there, but you'll have to work harder than a dart-throwing monkey to get those sorts of returns in 2010.
In fact, as I mentioned earlier, quite a few well-respected investors are expecting the stock market to fall in 2010, maybe by as much as 20%, although probably not all in one hit as we had in October 2008 and March 2009.
Markets To Fall 20%
Prominent US investor Marc Faber said yesterday on Bloomberg he thinks the S&P 500 may retreat 20% because shares are expensive given prospects for economic and profit growth.
"The market has become overbought. There isn't a meaningful improvement in the economy taking place. The economy has stabilized, but isn't really expanding."
"Financials have already been quite weak. It's kind of a warning sign for the market. They may weaken further, especially the banks. Also commodities-related stocks could weaken somewhat as commodity prices ease."
Still, it's not all doom and gloom from the man who publishes the Gloom, Boom and Doom report.
"In general, high-quality and large market capitalisation stocks are reasonably priced considering you have zero interest-rates. As these markets go down, the high-quality, large-market-cap stocks will go down less than the smaller-cap stocks."
Your Two Options Today
Marc Faber believers seemingly have 2 options…
1) Sell up now and buy back in if and when the market corrects by 20%. Good luck with that strategy, because timing the market is generally a mug's game. You are either a long-term investor, committed to the stock market for years, not days and weeks. Or you're a short-term trader, paying your money and taking your chances.
2) Stick with the blue chips, hoping they don't get dragged down too much with the rest of the market, should it actually fall.
I'm with option number 2. Not necessarily because I think we're in for some sort of market correction, but because I think they are cheap and offer decent income and growth prospects.
But by now, you should know that anyway.
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