In a precious book of memories, the great scholar of ancient philosophy Mario Untersteiner (1899-1981) recalls the figure of his primary school teacher of the royal imperial school of Habsburg Rovereto. Under the portrait of Franz Joseph, the master addressed his pupils using her and theirs. For tomorrow, let them study this and prepare this one, because they will be interrogated.
The school has changed and today it is often the students who give the teachers the first name. What hasn't changed, over the generations, is the seasonality of the school year, which was originally calendarized, in still largely peasant Europe, in order to allow young people to participate in the harvest. Hence the origin of the long summer holidays.
The seasonality that interests us here, however, is that for which the first part of the school year is characterized by a particular severity on the part of the teachers, who do not hesitate to assign sadistically low grades, accompanied by judgments bordering on politically incorrect. However, in the final part of the school year, this sticking to the mistake or blunder turns into an overall judgment on the pupil's personality. The grotesque minuses become stretched sufficiencies and the sarcasm of autumn judgments becomes a magnanimous expression of faith in the student's possibility of continuing his studies at the beginning of summer. Rejection is reserved only for particularly delicate and difficult cases.
Something similar happens atstock year. It starts with clean books, with the performance counter reset and with positive narratives that project further improvements over a legendary second semester. With the arrival of summer, the money has already been spent, the liquidity reserves are low and the reality, even in the good years, never fails to reserve some disappointment or negative surprise. Thus, between the end of August and the end of November, the market becomes insensitive to positive news, already discounted, and exacerbates the negative elements. Psychologically or financially fragile wallets sell, the market drops even more and the narratives become dark and destructive.
In December, however, those who had to buy bought and those who had to sell sold. It's the only time, December, when you don't run too much after dreams and free yourself from nightmares and neuroses. The gaze detaches itself from the latest data that has just come out and strives to express an overall judgment on the past year, exactly as the teachers do in the class council at the end of the school year.
Today, with September having just begun and with the SP 500 down by 6,5 per cent compared to the beginning of the year, it makes sense to sell only if one considers that in December, on balance, 2015 will be judged one year behind 10 or less than 15. Instead, it makes sense to buy or, more prudently, to hold, if you think that the year will end unchanged or with a (modest) positive result.
In America, 2015 will end without excess inventories, with car sales at post-crisis highs and close to all-time highs and with a construction market that is showing increasingly clear signs of awakening. Sure, the oil industry will have laid off 100 people, but employment will have increased by nearly three million. Growth in the second half, China or not, will have been higher than in the first. Interest rates will be at 0,25, against the current zero, but this fact, widely discounted, will not have caused a bond bear market.
Earnings per share will be one to two percent higher than in 2014. Admittedly, not a spectacular result overall, but very interesting considering that energy earnings will have more than halved. As for valuations, in the hypothesis that we arrive at the current levels at the beginning of December, the multiple will be 16 on 2015 and 15 on reasonably foreseeable profits for 2016. With these premises, closing 2015 with a stock market downturn larger than 6.5 percent now would be really ungenerous.
For Europe, with theEuro Stoxx who has lost all earnings since the beginning of the year along the way, the final balance will be even easier. Today's Euro Stoxx is at the same levels as in November 2014, when the dollar was at 1.26, oil was above 80 dollars, inflation was at zero, half the continent was in recession and Quantitative Easing seemed an uncertain promise.
As Stanley Fisher said in Jackson Hole, the effects of a currency realignment are mostly seen in the second year. Also for this reason, European growth will be higher in 2016 than in 2015 (the opposite, of course, will happen for American growth).
As for China, the perception of the market at the moment is so negative that it is difficult to think that in December it could be even more so. Such is the anti-Chinese fury that this week we happened to read a study that claims that the unemployment in China it is at least double the 4,9 indicated by official statistics, while elsewhere we have read that the shortage of manpower and the consequent increase in labor costs are undermining the country's competitiveness. How then the sharp increase in wages and the drop in savings can be reconciled with a possible crisis in Chinese consumption and imports remains to be explained.
Chinese data will be better in December. No government in the world devotes as much energy to year-end window dressing. It is not just a question of massaging the statistics, but of encouraging the achievement of the annual plan objectives in all possible ways, in particular through credit. We do not go as far as Timothy Moe of Goldman Sachs does, to recommend the purchase of H shares listed in Hong Kong (multiple below 9), but we think that the market attitude at the end of the year will be less hysterical and more balanced of today.
A world with little growth it is certainly a fragile world, but it is also a world that does not get hot. However, the wound from 2008 is still open and the market is instinctively led to fear, at the first hitch, that a new devastating crisis is upon us. In 1937, at the first signs of cyclical weakness, companies stopped producing and the stock market halved because the memory of the dramatic years between 1930 and 1932 was still fresh. Then, once the fear had passed, production and the stock market quickly recovered .
Today, the mere assumption that the end of the cycle is near can send the market into a panic. However, just as there are false starts, so there are false arrivals. What we are experiencing is the first false arrival. The next ones will lead to even more volatility. Saying this means that, in order not to put coronaries at too much risk, risk positions will be progressively reduced over the next two to three years. However, be careful, it does not mean that we will not be able to review the highs of the past months. On those peaks, however, it will be good to lighten aggressively.
