The Dow Jones index closed below 12,000 on Friday. The S&P broke below 1,300 as well as another set of weak jobs data tumbled out in the United States. These could be ominous signs. Every emerging market investor is trying to gauge the extent of downside for the US markets. Neither the economic newsflow, nor the stock market action there is signalling that we are near the end of the pain.
Of course, markets and economies don't bottom out at the same time. It is entirely likely that the Dow will bottom out well before the US economy hits it’s trough but that will only happen when the market has some inkling of how bad it will get and for how long. A mild recession may be priced in already but I doubt whether the market has a handle on the exact magnitude of the credit problem and how long it could all drag on.
If investors were sure that this will be no more than a two-quarter recession with growth picking up by the end of 2008, then my sense is that markets would have started showing the first signs of bottoming out already. But as new skeletons keep tumbling out of the US closet every week and as a growing inflation scare complicates the problem at hand, the market is just not sure.
At some point the market will stop responding to incremental bad news but maybe that point is not here yet. The global screen is not saying it for sure. The Dow has slipped but whether it has corrected enough is a matter of debate. From it's January high of 13,300 the Dow has lost 10 per cent. From it's highest point of 14,200 in 2007 it's down around 16 per cent. These cuts are not insignificant but they are recorded from peaks which were hit in fairly heady market conditions, globally. Does a 10 per cent slide fully price in the pace at which economic news has deteriorated this year? Maybe not. Perhaps it's the steady dose of steroids from the Fed which have kept the Dow afloat.
A last bout of complete capitulation as the newsflow hits it's nadir cannot and should not be ruled out. Just in the near term, the next date on the global calendar is the 18th of March, when the Fed will perhaps have little option but to slash 75 basis points. That may trigger some short covering but with that the Fed would have fired most of the bullets in its gun. Also, what that may end up doing is fuel the commodity rally to even greater highs — potentially aggravating the inflation scare.
As important psychological supports crumble in the US, the Nifty also seems to be headed for a retest of it's january lows of 4500. At those levels valuations in many stocks would appear attractive. I hear leading mutual funds like Reliance started buying stocks on Friday and I do hope they buy more this week. This market sorely needs some leadership, from big stocks and big investors.
(Udayan Mukherjee is an Executive Editor, CNBC-TV18)