Have Equity Markets Gone Too Far Too Quickly?

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.

Comments

[Roger Knights:]

"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."

We're at the bungee apogee.

Nov 10 08:39 AM

[Russ Wetherill:]

Did equities also fall too far, too quickly? Was DOW 14,000 a real value, or was it inflated by HELOC spending?

Maybe DOW between 9,000 and 10,000 is where it should be, and perhaps, should have been all along. With all that's transpired over the last few years, I think the only way to estimate value is to forget the past and look at prospective earnings going forward. Earnings won't improve much until consumer spending comes back. That will take time since the average consumer is mired in debt, and generally more inclined to save than spend.

But, as long as the wheels don't come off the cart completely, I expect that the market will remain basically where it is for the next few years until all of the debt is paid down, and lives are rebuilt.

A decade from now, the economy should be well into recovery mode and stocks purchased today should be doing well.

Nov 10 05:54 PM