Market wobbles & credit conditions
Just when we thought it was safe to get back in the water! Things are looking wobbly again - the US rally has fizzled out for now, and the S&P500 futures are now hovering around a key support level of 1867.
The rally in oil has also quickly reversed, and China took another tumble overnight, see this chart courtesy of IG;
Market gyrations are one thing, but more people are becoming aware of the pressures building up in bond markets - where junk bonds are problematic, and there are likely to be widespread defaults in bonds related to the resources sector.
Have you looked at the share prices of banks lately? They are down very heavily. That is a warning sign to my mind - clearly the market thinks that there's trouble ahead. I think that makes sense - as mentioned the other day, 7 years of near-zero interest rates has undoubtedly caused gigantic misallocation of capital (e.g. apparently China has 65 million empty flats!), and when some sort of trigger occurs to start defaults happening, then bad debts begin to appear.
At that point everyone starts worrying about contagion, and counter-party risk, so credit availability tightens, and weaker financial institutions get into solvency trouble. In other words a re-run of what happened in 2008. I'm not saying it will necessarily be as bad as that, but I am getting increasingly worried about credit conditions.
Bank balance sheets are much stronger than they were in 2008, but I think we could well see tighter credit availability - which would be likely to push us into another recession. Therefore I think it's a good time to look closely at everything in your portfolio, and consider whether earnings might now have peaked - does the valuation still stack up if earnings were to drop say 20-50%? Almost certainly not, in many cases.
This could be scaremongering, and everything might turn out fine, we don't know. I always like to consider what-if scenarios though, and at the moment I'm wavering between thinking things are probably going to be alright, and waves of worry about the risks.
I'm keeping my eyes peeled for more cautious outlook statements from companies, as that is one of the canaries in the mine, along with forward-looking economic data, such as PMI reports each month.
Oil
Not my area of specialism, but I…
