The market may be ready to dip. That will make the glass look half full

Stocks are ready for a dip. The current rally has gone on for too long and it ought to get resolved in a sudden shakeout. In markets, when the sky seems blue, a black cloud appears from nowhere. Is that cloud going to arise from the weakening US housing market? That market is an important indicator of the health of the US economy and it is now looking sickly.

In September, homebuilders slashed house prices at the fastest pace in 36 years, boosting sales to the highest level in three months. New-home sales are down 14.2% in the last year and are down 16.5% year-to-date. Inventories of unsold homes are up 14.4%. The number of unsold completed homes rose to a record 157,000 in September, up 47% in one year. Median prices dropped 9.7% to hit the lowest level in two years. It’s the largest percentage decline in median prices since December 1970. Median prices for existing single-family homes are down 2.5% over one year, the largest decline ever recorded. Homebuilders are piling on incentives, including vacations and new cars, to sell homes.

Since the inventories are huge and prices are falling, many households are expected to feel poorer, feel restrained by mortgage equity withdrawal and cut back on spending. Home building will spiral down some more until it finds equilibrium. That will take the US market down. And, if the US market sneezes, emerging markets will have a bad attack of bronchitis. Or so goes the conventional wisdom. Well, the conventional wisdom may be wrong. Or even if it is right, it may mean little. The market may go down, consistent with conventional wisdom but it may rebound with greater force. In fact, the surprise package may be how strong the next leg of the rally in emerging markets, especially India, will be. And it will draw strength from what is precisely perceived as a weakness. A weak US economy will prevent the Federal Reserve from raising interest rates. In fact, public memory is short and we have forgotten that the tough talk of Federal Reserve about inflation and interest rates in May sent the world markets reeling. Where is inflation now? Also, even as they frightened us about inflation, the central banks are printing loads of money sending financial asset prices soaring! Until this spigot of money is turned off, stocks will do well.

Finally, as and when the next global market scare happens and foreigners sell emerging markets, it would be a good time to buy. Markets, like India’s, have reached a critical mass and will continuously pull away from the Western markets. Remember, in 2000 February, Dow was a shade below 12000 and the Sensex was 6000. The Dow has just gone past that level after six years, while the Sensex has doubled meanwhile . - D.B.