Guess what?
That heavy thump you heard from stockmarkets around the world, especially in the US with the 9% fall in the Standard & Poor’s 500 index on Wednesday, was the sound of the last rose coloured glasses falling from the noses of investors, commentators and investment analysts who have finally accepted that the globe is heaving into a recession, led by the tottering US, UK and European economies.
After falling Wednesday, European markets again fell heavily Thursday, but the selling wave in the US slowed as investors accepted the new reality. In fact Wall Street bounced strongly in late trading.
Resources were heavily hit as big investors abandoned their last defensive position..
Wednesday and Thursday saw a collection of figures, reports and comments that confirmed that the global economy will drop below the International Monetary Fund’s idea of a global recession in 2009: that’s global growth of 3%.
It is now clear that the US economy is sliding, nastily, but speedily into a slump the like of which we haven’t seen this side of World War 2. US consumers, who carry the US economy on their backs by generating 70% of annual activity, are being battered into submission.
Consumer spending, consumer credit and retail sales are all falling at levels not seen for decades. There is every chance that October’s and November will see declines even sharper than we have seen in August and September.
The monthly investment manager’s survey from Merrill Lynch, released overnight, says "Investors are waiting for the right conditions to return to equity markets amid the most pessimistic outlook yet recorded"
The survey, completed as global equity markets fell in value by 18.7%, shows that almost seven out of 10 respondents (69%) believe that the global economy has entered recession, up sharply from 44% one month ago.
Growing risk aversion has led to a record 49% of respondents who are overweight cash.
The number of respondents who believe equities are undervalued has reached a 10-year high, at 43%.
"Fund managers are waiting for the triggers that will give them the confidence to buy," said Gary Baker, head of equity strategy at Merrill Lynch.
What they are looking for is a loosening of monetary conditions and for third quarter earnings to clarify where problems and opportunities lie across equity markets."
But the survey showed that respondents appear to be placing little or no credibility in consensus earnings estimates for the year ahead. A net 92 % of respondents regard estimates as "too high," and more than half say estimates are "far too high."
At a time of global pessimism, the gloom is no more concentrated anywhere in the world than in Europe. A net 41%t of global asset allocators are underweight euro zone equities. Europe has now assumed the UK’s mantle as the world’s least popular destination for equity investment.
The survey also found U.S. fund managers are now much closer to fully accepting what they expect will be a deep and prolonged U.S. recession.
"In our view, however, it is too soon to say we have reached a bottom in equity markets given the current financial market turmoil," said Sheryl King, senior US economist at Merrill Lynch.
Oddly enough, we should be relieved by this information because there’s something comforting by an acceptance of an impending or developing recession.
I’d much rather face that than the absolute fear and loathing we saw on markets last week in the global credit panic.
That’s not to say the pressures from the panic have gone: they are still with us, but Wednesday and yesterday’s weakness on global markets was more an old fashioned acceptance that economic activity is sliding and that there will be more pain and suffering before we get through it.
But not an absolute and stunning collapse.
We are not out of the woods by a long way, but if central banks and governments hold their nerves, we could get away with just a severe economic mauling instead of a replay of 1932-33.
So what happened?
The US Fed
said that economic activity had worsened across all of its 12 reporting districts across the country with falling activity in retail, financial services, housing, tourism.
The Fed’s beige book survey of economic conditions revealed pervasive weakness, with tight credit, deteriorating consumer spending and a weak labour market across the nation.
Fed chairman, Ben Bernanke and the head of the San Francisco Fed, Janet Yellen, both made it clear, in their own way, that there was no quick fix or early rebound for the slumping US economy.
That hopes of a recovery in 2009 were misplaced, and 2010 might see some improvement.
US industrial production fell sharply last month, hit by storms, slumping demand and the credit crunch. The Fed said the drop of 6% was the largest for 24 years and production would have dropped even if there hadn’t been storms in the Gulf and a strike at Boeing.
Another Fed survey in Philadelphia showed a sharp contraction in manufacturing in the area, while the commercial paper market again shrank, but the rate of decline is slowing as the Fed starts lending money to leading companies.
US retail sales fell 1.2% in September, almost double the fall forecast by economists as cars, food and every category saw weakness. Sales on internet auction site, eBay off 1% in the quarter, the first fall in history of the company.
The fall left retail sales 1% lo
