Markat Shocks

A sharp dip on the Shanghai stock market at the end of February sent shudders around the global investment community. The initial slump in China had centered on worries that the markets were overheating and that the government may intervene to cool things down and try to limit profiteering.

Any threat of abated growth in China seems to panic the economic world these days, and with markets having rallied strongly for the first eight weeks of the year, it is perhaps unsurprising that this nugget of bad news lead to such a marked sell-off. The longer markets climb, the twitchier investors get as they hang on to the last possible moment before selling their stocks and taking their profits.

The key question of course is whether this is another “correction,” bringing share prices back to more realistic valuations after a long rally, or whether a recession beckons. Even the experts don't seem to know!

While Federal Reserve chairman Ben Bernanke believes the good times are set to continue, his predecessor Alan Greenspan thinks the markets have peaked and says there's a 1-in-3 chance the US economy will fall into recession this year.

Equipment impact

All ACT can say is the dip has had a significant effect on the heavy equipment sector. Being a cyclical industry, its share prices tend to grow above the mainstream markets when the going's good, but unfortunately suffer bigger losses when things head south.

Over the course of week nine, when the markets dipped, losses for the mainstream indicators ranged from 3.56% for the Dow to 4.78% for the NASDAQ. ACT's Heavy Equipment Index however was down 5.86%.

This was just the sort of news the sector didn't need, and further illustrates how its fortunes have changed over the last few months. Having outperformed mainstream indicators for all of 2005 and 2006, the ACT HEI is now performing quite poorly by comparison. As our graph shows, its net gains over the last 12 months have been just 2.5%, well below the Dow's 4% rise over the same period, and significantly worse than both the NASDAQ and S&P 500.

The events of late February mirror the two other heavy sell-offs in the equipment sector of the last 12 months - those of May and October last year. Although it has rallied reasonably following these drops, our graph illustrates that the severity of the various dips have made it difi cult for the ACT HEI to hang on to any gains it has made.

Outlook

What the markets do next depends on the economy. If data points to a significant slowdown in growth or even a recession, the history of the ACT HEI indicates that it will be hit harder than the mainstream indexes. However, if corporate profitability can improve further there may yet be some gains to come for the markets. First though, they will have to shake off the current volatility and regain some lost ground.