Page last updated at 09:30 GMT, Friday, 4 September 2009 10:30 UK

Are shares about to fall off a cliff?

At the end of each month, BBC World business presenter Jamie Robertson takes a look at the world's major stock markets. This month he considers whether the beginning of the end of government stimulus plans could spell bad times for the markets.

A scene from North by Northwest
Exactly where the cliff will be, how high it is and what sort of mess we expect to find at the bottom is hard to work out

Let me start with a few observations:

1. September and October are the favourite months of the year for a correction/crash

2. No market goes on forever upwards in a straight line

3. We have had the strongest rally since the, er... 1930s.

The question is, as it always is, one of timing.

'Not inevitable'

Commentators are, with a few exceptions, gesticulating wildly as the markets head towards this supposed cliff some time over the next few weeks.

But exactly where the cliff will be, how high it is and what sort of mess we expect to find at the bottom is hard to work out.

Stephen Pope from Cantor Fitzgerald Europe, however, is one of the exceptions.

September and October may be favourite months for corrections, he points out, but to say that these corrections are inevitable is plainly ridiculous.

He has collated the gains and losses on the S&P 500 over the last 20 years, which reveal a pretty mixed picture:

• September: 11 declines and 9 increases

• October: 7 declines and 13 increases

• Fourth quarter: 6 declines and 14 increases.

Furthermore, he explains that any sell-off in September is often followed by a rally the following month, which is why the fourth-quarter figure shows such a predominance of increases.

"What is wonderful about the economic numbers that have been coming through in the last month is not just that they show the rate of decline is reducing, it's that the raw data is pointing up," he says.
"Business, corporate and individual confidence are all on the up."

Bitter truth

Cars await recycling
Now that the US scrappage scheme has been removed, in September we will see the sales figures way, way down. The reality of what is affordable will suddenly hit people
Howard Wheeldon, BGC Partners

But there is a problem that lies at the heart of this six-month rally.

The profits that spurred the optimism have come from cost-cutting, cuts in the labour force, restocking of inventories and some subsidised buying, such as car scrappage schemes.

The bitter truth is that none of these are sustainable.

Howard Wheeldon, senior strategist at BGC Partners says: "The car scrappage scheme in the US is a good example. Now that has been removed, in September we will see the sales figures way, way down.

"The reality of what is affordable will suddenly hit people, and the impetus to buy will have gone. The question is whether it will spread out to other areas of the economy. Certainly the components sector will be affected.

"But the motor industry has a huge effect on the overall economy. We have been too wide-eyed over the numbers of the last two months."

Stephen Pope disagrees. He thinks companies have restructured drastically and are ready to reap the benefit.

"The latest figures we have seen on productivity in the US and on labour costs show they are now so lean that any increase in sales will come straight through to the bottom line."

What's more he says there is still a wall of money sitting in Treasury markets waiting to come into the market.

China correction

shanghai composite index

However one market that may have already begun to correct is China.

While the rest of us have been drooling over our ballooning portfolios, the Chinese investor has been watching profits slip-sliding away since mid July.

Certainly there is still a gain since 9 March - 37%. But be honest - which one of us bought anything on 10 March? But the gains are disappearing very fast.

Linda Yueh, fellow in economics at Oxford University, says the Chinese market tends to follow confidence - or the lack of it - in the economy generally, rather than corporate performance because of the predominance of state ownership.

"The fall in the last three or four weeks has been around 20% which is a pretty amazing drop," she says.

"It really reflects how the Chinese government has begun to indicate that they are going to rein in bank lending, largely to prevent asset bubbles forming in the economy.

"However they have also said they do not want to tighten monetary policy, because they don't want to choke off economic growth. They are walking a very fine line."

Weaning economies

It may be that the Chinese market has spotted something that the rest of us haven't.

They are not the only ones that will be trying to work out how to wean their punch-drunk economies off the milk of government support.

While bankers' bonuses may get all the headlines at the G20 meeting this weekend the issue of creating a self-sustaining recovery without government stimulus packages will be higher up the agenda.

Already in Australia, which is one of the few countries to have avoided recession over the last two years, there are political voices being raised against spending all of the US$35bn stimulus package, now that growth there appears reasonably established.

The louder these voices become around the world, the more the markets will begin to fret over whether the global economy can hobble along, let alone walk or run, without the aid of a government subsidy cheque.

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