What a defence a few days makes, this time last week the banking system was on its knees once again, the world was being flooded with oil, recessionary fears were everywhere. As equity markets and cyclical stocks in particular enjoyed a jolly good bounce in the first half of the week, it only goes to prove once again that it’s darkest before the dawn.
What changed, on the face of it not enough to encourage equities to bounce by more than 5% in the space of a few days. Equities and the oil price appear to remain linked and the oil price did recover from the lows on hopes that a deal to restrict supply may be reached. The announcement that Jamie Dimon bought some JP Morgan shares helped halt the slide in that sector. The US economic data this week was the usual mixed bag. On the positive side producer prices rose a little more than expected, industrial production month on month also slightly stronger. The minutes of the last Federal Reserve meeting appeared to confirm that the recent market turmoil would lead the group to be more cautious on further rate hikes. On the more disappointing side, the Conference Board leading indicator fell 0.2% in January, but the board did not believe this indicated an immanent recession in the US. The OECD lowered their global growth forecasts for this year from 3.3% to 3%. Investors also appeared to be prepared to ignore the weaker than Chinese expected import, export data.
I suppose all this does go to prove is that sentiment does play a part in investor psychology. At the point the market rallied retail investors, according to American Associate of Individual Investors had reached extreme levels of bearishness. The Merrill Lynch survey, as we pointed out, suggested money managers had high levels of cash, and had been reducing equity weightings.
The Vix index, which many use as a guide for investor sentiment fell back on Thursday evening to the low 20’s. For most of the year so far, equity markets have tended to rise when the “fear” index reaches 30 and fall when greed reaches 20. As we have said before in these commentaries sentiment seems to change on an almost hourly basis, and one would not be surprised to see some of the recent gains given up again, as the focus returns to the uncertain fundamentals. Mr Levine's piece will be kept close to hand, just in case.