Have Equity Markets Gone Too Far Too Quickly?

by: TradingHelpDesk

Unemployment has now passed 10%. You can add another 7.5% on to that figure if you include Americans who have given up looking for work. But risky assets are still rallying, though the volatility has picked up in recent sessions.

So have equity markets gone too far too quickly? Of course we will only know retrospectively, in around 18 months after the 08/09 recessionary dust has settled.

But in six months the Fed will start increasing rates and will certainly aggressively withdraw its other stimulus. It has too. Obama's administration will also need to increase taxes or slash spending to start the long and painful process of bringing the fiscal deficit under control.

Both of those scenarios will restrain growth. So unless the consumer, who has historically contributed around 2/3 of economic activity, starts to carry the growth baton, the US economy will fall back into recession. Surely?

Then investors, the 2008/09 crash still fresh in their minds, will sell risky assets at the speed of a thousand gazelles and we will re-visit March's lows and loiter there for years. Which is of course what happened to equities during the Great Depression after the dead cat bounce faded in 1930.

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