And what now?

Rally in equities since March already brought enough presents for those who had guts to invest in March (I was deemed mad when I was saying in March: buy equities. Shame on those who were too scared to make bold decision and missed one-in-century opportunity). Secondly, economy is disappointing. Even taking under consideration low base effect, there are no signs of steep recovery of V shape. Such recovery would justify 50-70% returns on equities across the globe since March 2009. With unemployment on historical highs, retail sales flat, anaemic growth of GDP and fluctuating ISM/PMI, investors cannot be optimistic. However, not everything is lost. Assuming that equities are (still) perceived as a gauge of how economy is going to perform around 6 months from now, next two quarters will make it or break it for equities. Further deterioration in economy plus potential decrease in companies’ earnings will make the situation very nasty. Do not forget that during last three quarters, earning season was a key driver of equities returns. The base effect was very generous however. It’s easy to jump over a paddle. Try the same with a river.

Next two quarters will not be the same. Expectations are flying high, there will be no such spectacular surprises in earnings on the upside, no more stars paying of government loan and earning nice fat billions of dollars, no more government support and printing of trillions of dollars pumping up in asset classes and less people eager to be hurt again as they were in 2007 and 2008 (although I’m not that sure about the last one – it’s again psychology rather than rationale). On top of that there are analysts that follow the market rather than examining it. They tend to rise expectations when they are high and temper them further when market has already done so. Therefore this time around, analyst keep chasing higher figure. They started to see things that are hard to see even in your dreams. Hence, do not expect easy earnings season.

What I can see at this moment, investors are sidelined again, awaiting clear signs of further direction. They don’t know what’s going on. People keep saying about correction from early May. But nothing of that sort actually happened. Since November markets are awaiting. Awaiting of clear signals from economy and from governments. On one hand, there are countries such as Greece or Dubai emirate that add to risk averse. On the other hand we still don’t know when and how governments will withdraw from printing the money (officially called quantitative easing) and leave companies on their own. And finally, strange and highly unsupportive of future growth potential policy of ‘too big too fail’ is looming over markets. Two years into financial crisis and we still don’t know how much money are needed to clear balance sheets of fallen angels. Recent additional support for RBS is the best example of how to loose money without even properly investing them!

All in all, the only way the situation of awaiting and uncertainty can be balanced out, is by economic figures. Anything more than that would be a beginning of new speculative bubble.