Stockmarkets: nasty surprises round the corner?

Stockmarkets may have bounced back to pre-credit crisis levels thanks to the Fed's surprise half-point rate cut. But there are plenty of clouds still on the horizon.

"You couldn't mix a better drink for the stockmarket," says James Paulson of Wells Capital. The Federal Reserve's surprise half-point interest rate cut propelled Wall Street to its best week in six months as investors bet lower rates would bolster the economy. The S&P 500 is back to around 2% below its all-time high, while the FTSE 100 has regained late July's levels. A slump in the widely monitored US volatility index a gauge of fear in the market also underlines the bullish mood. In Britain, fund managers including veteran investor Bill Mott have been buying bank shares; Mott reckons sentiment towards the sector has hit rock bottom and can only improve. Anthony Bolton has also increased his exposure to financials.

The Fed's aggressive move has fuelled the belief that further cuts may be in store to pre-empt economic weakness. Gerald Minack of Morgan Stanley says: "Rate cuts are like tequila shots you rarely have just one." Rate cuts are generally good news for markets: since 1970, the average gain in the S&P 500 index six months after the first rate cut has been 12.3%. UK stocks have typically been almost 10% higher after the Fed's first rate cut in the same time span, calculates Citigroup; over 12 months, they have on average gained 20%.

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