The Street in September: the calm before the storm?

The global markets finished September with a fifth monthly gain in the row, in total contradiction with its reputation of the worst month of the year for stocks, despite concerns about whether or not this move will be sustainable. The market is doing everything but acting like a market in a recession; the Dow gained about 15% in the third quarter, making it the strongest quarter in 11 years, and it was the best quarter in living memory for FTSE100 with gains of 22%.

Dow September

The markets have been marking time since mid-September. As soon as the market loses its forward momentum, the absence of investor conviction becomes obvious, largely because of the continuing stream of bad news we’ve seen, there is really little confidence in the outlook for growth in the trans-Atlantic.

We are now beginning the most important quarter of the year, traditionally strong, however the market defied convention in recent months and a lot a professionals are far from convinced that we will see the usual seasonal strength.

A few reason for these doubts:

Rising house prices in the US would normally be a good indicator of a return of buoyant feeling, and this month the S&P Case-Shiller index of house prices in 20 big US cities was up 3.8% from its low but this good news was cancelled out by a fall in US consumer confidence, which usually follows the stock market.

Government intervention and quantitative easing are partly to blame for the unsubstantiated market highs, with the end of government support in sight and the so-called “exit strategy”, with the risk that if this strategy is not executed properly, one possible scenario would be the “double dip” recession, which would involve the economy resuming growth but then falling back into recession.

There are actually a lot of opportunities for the players who can afford it, but a lot of questions remain:

Will consumers and businesses restart spending?

The last season was the worst in living memory and unfortunately the forecasts are everything but optimistic for the coming quarter.

Will companies enter a new cycle?

The last period has seen companies cutting costs in order to counterbalance the lack of growth in revenues. What was possible has been done; they now need revenue growth to resume in order to reassure investors.

Is the market level sustainable?

The answer to this question is directly linked to the companies ‘growth of revenues; if cost cutting is still the key to this market, investors will grow increasingly suspicious about rising stocks.

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