The worst of the credit crunch is behind us, the worst of the economic down-turn is ahead of us, and it is only a question of whether the worst of the economic down-turn has already been fully priced into equity markets.
I believe a global recession or worse is already priced, which means equity markets should have already bottomed. We are expecting a long period of consolidation base forming at current levels however for perhaps 6 to 9 months before any major up-trend really establishes itself.
The current drop in the Dow Jones and other equity markets is perceived here as part of this long struggling bottoming period, expected to be near, but stay above, the October lows.
Our view remains that this will be a mainly Western economy recession, and not global in that China will continue to power on as will many other emerging economies.
This will be the surprise to many who in the past have experienced that when the US slows, so does the whole world. The internal growth engine of China, the population flow toward consumerism on the east coast, is such that when combined with rate reductions and other stimulative measures, should ensure GDP growth is maintained above 6.5% over the next year, and may even achieve 8.5%.
At that rate of growth countries such as Australia will continue to enjoy the benefits of a strong China. In fact China remaining stable economically will allow the US and other western economies to survive this down-turn better than might otherwise have been the case.
Global markets are doing what they had become use to, that is a sharp fall in the Dow Jones causes investors to cut back on all their positions in all markets. This has markedly been seen in commodity markets, and current lows in Oil and Gold may still be surpassed before the close of trading for the weekend.
What is interesting however is that even as the recently typical sell off of currencies/buying of US dollars occurs, the US dollar still remains far below its recent highs. This may suggest the market place is beginning to recognise that rather than being the first economy to recover from this downturn, the US may in fact suffer the deepest and longest recession of any economy.
This time it may be a case of first into recession, and last out, for the US. Therefore a sharp sell-off of the US dollar may eventuate early next week.