It was another poor week for equities with the S&P 500 off by over 2% while emerging markets and the JSE were not spared the more bearish sentiment.
Metal and commodity prices however ended the week largely unaffected by the sense that the global economy was slowing down. Metal prices are still well ahead of year ago levels. The IMF updated its outlook for the global economy last week and left its forecasts very much as they were. Faster growth in Europe is making up for softness in the US. This should be consoling to those inclined to believe that the soft patch in US data releases are more than a temporary pause. The oil price as always will play an important role in the months to come in determining the spending power and state of mind of the US consumer. A modest pullback in US gasoline prices, while other commodity prices retain current levels, would be very helpful for the US consumer and the market mood.
Unless US earnings and dividends actually disappoint – index earnings are currently about US$81 per share and are expected to breach the US$100 level by year end 2011 – the US share market now offers even more value than it did a month ago with a prospective PE multiple of less than 13 times. Any threat to valuations from higher interest rates seems to have been put off for longer and the spreads over US Treasuries offered by investment grade and high yield corporate borrowers in the US barely budged last week. Despite very heavy issuance of new corporate debt and despite the thought that the US economy may be slowing down, high levels of confidence in the strength of US corporate balance sheets has been maintained. The performance of the US economy and the equity markets will depend on confidence: US business leaders have to deploy their strong balance sheets. Washington DC could help by dealing effectively with its fiscal deficits.