Equity markets have started March much as they ended February, rather directionless. On Monday the FTSE 100 flirted again with the 7000 mark, only then to suffer what appeared to be altitude sickness and retreat back below 6950. The UK equity market was boosted again early on Tuesday as a Markit survey reported a pickup in construction for the month of February, again only to drift as the day wore on. As the FTSE 100 jockeys around the 6950 level , technical analysts will use 6900 as the point of support in the coming days, hopefully to allow it to finally push on through 7000.
Things in Europe appear to be continuing to improve, as the euro area announced a modest fall in the level of unemployment and a stabilisation the core inflation rate for the month of February. The improving outlook for Europe also seems to be reflected in company earnings. According to Merrill Lynch's latest report on the European earnings season, the ratio of earnings upgrades to downgrades has risen ever so slightly. They add that despite valuations looking on the high side, these higher valuations can be sustained if the earnings cycle is improving. This is a point we have made on more than one occasion, equities can stand higher valuations if earnings are growing. The problem comes if corporate earnings are not seen to be growing. One has to temper the earnings optimism in Europe as many companies will have seen the benefits from the weaker euro, but even taking that into account one gets the sense analysts appear to have more room to upgrade earnings expectations for the year ahead.
We have often made the point in our blog that this feels like the most unloved equity rally in history. John Authers in the Financial Times addresses some of the reasons why he believes this is the case. Initially he goes to make the point that investment banks have traditionally benefited from bull markets, on this occasion banking revenues have hardly grown as banks have suffered from a stiffer regulatory backdrop, so they don't love it. Investment managers of a all types have generally failed to beat market rallies leading to an increase of the use of exchange traded funds, no love there. The most important point, no one believes in it or trusts it, taking the view that the rally has all been driven by central bank money looking for a home, when the crutch is removed the house will tumble.
From our more than 30 years of experience it really does feel the most unloved, historically when markets hit all time highs greed not fear is in abundance. Long may this fear last as while it does there is hope equity can continue to climb higher.