'Insane' stock market rally starts to fizzle
Stocks have rallied over the past few weeks, but a sustainable recovery is hardly likely until the financial system has been sorted out.
Over the past few weeks, investors have "slipped on their rose-coloured glasses", says Alan Abelson in Barron's. US stocks have had their best six-week stretch since the 1930s, with the S&P up by 30% and the FTSE 100 gaining 17% by the end of last week, as economic data deteriorates at a slower pace. But as Nouriel Roubini of New York University, who predicted the crisis in 2006, points out, over the past two years the stockmarket has "predicted six out of the last zero economic recoveries".
A sustainable recovery is hardly likely until the financial system has been sorted out. Investors were brought back down to earth on Monday by bad news from Bank of America. "It hardly helps the great bank-recovery story when the US's biggest financial firm by assets comes out with ugly results," says Peter Eavis in The Wall Street Journal.
Non-performing loans jumped by 42% from the fourth quarter to the first, a reminder of more losses to come as the economy continues to slide. Mike Mayo of Calyon Securities recently estimated that residential mortgage losses are halfway to their peak, while credit card and consumer loan losses are only a third of the way there. So further "financial shocks" are on the cards, while hopes of a return to 2% growth next year are over-optimistic, heralding further earnings disappointments, says Roubini. "I'm still cautious and bearish." With house prices still plummeting, credit tight and consumers only just beginning to work off their debt load and rebuild savings, that makes sense.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
This is a "globally synchronised recession combined with a vicious financial bust", says Lex in the FT. An International Monetary Fund (IMF) study shows that recessions accompanied by financial busts are usually twice as long and deep as normal downturns. That implies it will be at least a year before the recession ends. "Not even stockmarkets are that forward-looking." Concern that banks may need more bailouts has also been fuelled by the fact that the stress tests US banks are undergoing to assess their capital strength look "stress less", says James Montier of Socit Gnrale.
The worst-case scenario includes unemployment hitting 10.3% next year, a level looking likely to be exceeded. We've "got ahead of ourselves... the recent rally has been insane", says David Buik of BGC Partners. The next few months will be "brutal" for the economy.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
-
The MoneyWeek Christmas Charity Appeal: who are we supporting and how to donate
This year MoneyWeek is supporting YoungMinds, tackling mental health for children and young people. Here’s why we are partnering with YoungMinds and how you can help.
By MoneyWeek Published
-
Lloyds Bank’s £200 switching bonus ends next week - act now
Lloyds Bank is currently one of six providers offering a current account switch bonus
By Oojal Dhanjal Published