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Fundamental problems may pull stocks back down to earth

Fundamental problems may pull stocks back down to earth
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First Published: Sun, Sep 20 2009. 09 19 PM IST
Updated: Sun, Sep 20 2009. 09 19 PM IST
The US stock market has been soaring. It may have gone too far, too fast.
Gina Martin Adams, an equity strategist at Wells Fargo Securities, certainly thinks so. “I would definitely tread very lightly in stocks,” she said. At the moment, there appears to be enough momentum to keep propelling the rally forward until it “stumbles on some speed bumps”, she said, but warned that stocks were no longer cheap, especially with the financial system and the economy still fragile.
At some point, and probably fairly soon, she said, a host of fundamental problems would pull stocks back down to earth—but, of course, she could not say when.
Stocks have certainly come a long way since their 9 March lows, with the Standard and Poor’s 500-stock index rising 58% in one of the most powerful upturns since the Great Depression. The recent rally, of course, followed the steepest decline in decades. The index stands at 1,068.30, still well below its October 2007 peak of 1,565.15. A rebound of some sort was likely after the battering inflicted on financial markets during last year’s panic.
In a speech on Wall Street last week, commemorating the anniversary of the collapse of Lehman Brothers Holdings Inc., President Barack Obama said the most acute phase of the financial crisis was behind us. But he cautioned that the economy remained weak with rising unemployment, and that a variety of emergency government programmes would continue to play a significant role in keeping the economy afloat.
And Ben S. Bernanke, the chairman of the Federal Reserve, warned in remarks in Washington that while the US was probably out of recession from a “technical perspective”, the economy would still “feel” very weak for some time.
Despite this grim backdrop, Laszlo Birinyi, president of Birinyi Associates Inc., said he believes we are in the early stages of a classic bull market that has plenty of room to run.
In his view, the economic weakness has been documented so well that the market has already taken it into account.
Where Birinyi emphasizes opportunities, others are focusing on the dangers. David A. Rosenberg, the former Merrill Lynch and Co. economist who is now with Gluskin Sheff and Associates Inc. in Toronto, did not expect so robust of a rally, and said underlying structural weaknesses in the economy implied the market was due for a big fall.
The Federal Reserve is steering a tricky course, attempting to stave off deflation by creating enormous quantities of money and holding its benchmark short-term rate near zero. At the same time, Fed policymakers say they are preparing to reverse themselves to head off inflation. Will they manage a “Goldilocks” strategy, just loose enough to keep the economy growing and nimble enough to head off inflation? Watch the 10-year Treasury yield closely, Adams said. It’s now 3.47%. If it stays low, she says, it could be a sign that the economy and stock market are in real trouble.
In the meantime, enjoy the rally.
©2009/ THE NEW YORK TIMES
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First Published: Sun, Sep 20 2009. 09 19 PM IST