Time to move back into equities?

The bull market case for equities is certainly easier to make today than it was a few months ago, but it may be premature to call the end of the three-year bear market.

Some things have changed. The devaluation of the US dollar effectively devalues US equities without the pain of a further collapse in share prices. Moreover, it does nice things to foreign earnings when reported in US dollars.

Yet US equities remain overvalued by long-term historic criteria and chartists point out that the cyclical bottom has not been reached. Quite what sort of very nasty shock it would take to send the Dow Jones to the 5,000 level is hard to say, but on September 11th the world discovered that bad events can happen.

On the other hand, there is a precedent for an economic recovery at this stage. Look back at the 1929-32 bear market in equities and you will find that it was a huge devaluation of the US dollar that proved the decisive break and equities pulled up sharply in 1933 which was still not much consolation to those who jumped in the previous years.

Less prosaically if we look at the buying and selling of shares by directors of public companies then we see a different story. At the moment directors are net sellers of shares and that bodes badly for the share price outlook.

So perhaps global stock markets are just in the last days of a post-war rally and will soon take a traditional summer fall. Certainly in Europe and Japan there seems to be little for investors to smile about with economies now ex-growth and a weak US dollar to accommodate.

However, the US is facing a presidential election next year and Wall Street usually rises on the back of election propaganda. But it could well be that investors will see the markets head lower again before then.

What is more to the point is that even if global markets continue to rise from present levels - and never turn back again - there is nothing to suggest that markets will do much more than move sideways or show very modest growth.

That suggests that the present global equity markets have a considerable downside risk, and limited upside. In that case, investors should continue to look for alternatives to equities and await a clearer case for investment.