Share market sentiment takes an ugly turn today. The question for investors is glaring – “is this a buying opportunity, or the start of much worse to come?”
Overnight action is indicating worse to come. Markets ignored a positive reading on the Conference board’s US Leading Indicator Index – an economy wide measure – and company reporting over the last three weeks of an economy wide average increase in earnings of 18%. Instead, it sold off on a weak Philadelphia Fed manufacturing read, a slight increase in jobless claims and a higher inflation reading driven by oil prices that have since fallen.
Safe haven buying saw gold trade to another record high. Ironically, another asset class to move close to all-time highs is US bonds, in spite of the fact that a considerable contributor to current fear is concern over the US economy.
Clearly, sentiment is driving markets at the moment. If this negative outlook starts to weigh on consumer and corporate behaviour, the fear could become self-fulfilling.
However, those who prefer numbers to emotions could be readying to buy. The only way to justify current share market levels is to assume a vicious cut to current earnings estimates. If this massive revision does not come through, on any of the basic measures of share value – PE ratios, dividend yields, discounted cash flow valuations – shares are cheap.
Investors with a 12 month or longer investment time frame may do well to remember the saying – “fortune favours the brave”.