The big freeze in the US which appeared to briefly warm the hearts of investors evaporated at the start of the week. Chinese equities took a tumble again on Tuesday morning, leading to fairly tough start to European markets. The mood of the day was improved somewhat by earnings from Johnson and Johnson, Procter and Gamble and 3M all beating expectations, and later in the day oil rallied back to $30. Apple reported earnings after trading hours, despite revenues missing expectations as sales of iPhone’s disappointed, Apple likewise managed to beat earnings estimates. Siemens the German conglomerate also surmised the market with a fairly upbeat assessment of the outlook, as it raised earnings guidance for 2016. Possibly the most interesting comments came from the CEO as he described the Chinese economy as “not as bad as people think”.
The equity market remains one in a flux, as sentiment seems to change almost hour by hour with each new data point. Fears on one hand of a global recession for reasons stated in previous blogs, balanced with valuations not looking to unreasonable, and a perceived lack of alternatives. According to a Bloomberg article, after this market correction a third of the 50 largest companies in Europe now trade below book value. The index overall trades at 1.6X book value, against a historic average of nearer 1.8X. One qualification to this report is the average is brought down mainly due to the bank and resource sector, on the other hand that could demonstrate these sectors now provide a decent risk reward.
If sentiment does improve and investors start to believe the US economy is not heading for a recession, and China is to quote the Siemens CEO not so bad, stocks could continue to recover. The concern is if the US economy can’t manage to grow when oil prices are on their knees and interest rates are close to zero, when will it? One can’t help but feel it would be extraordinary if the economy did go into recession in these conditions.
Released on Tuesday was the result of January’s preliminary services and composite (services and manufacturing sectors) purchasing manager’s surveys. The index readings, though slightly below expectations came in at 53.7. Consumer confidence in contrast beat expectations.
The Federal Reserve will have to take a tricky path later today with accompanying rate announcement statement. They will probably have to liken the economy to goldilocks porridge, neither too hot nor too cold. If they are too dovish then fears will reignite of a Fed mistake in December, and too hawkish analysts will focus on the next rate hike.