If there’s one phrase that can describe 2008, it’s “irrational exuberance.” The first trading days of 2009 around the world seem no different.
Stocks rallied in the US and Europe on Friday, with the Dow Jones Industrial Average up 258 points. Like clockwork, Monday saw Asian stocks rising, Tokyo’s Nikkei up 183 and Hong Kong’s Hang Seng up 520 points. In Mumbai, the Sensex rose 334 points, riding the global wave of excitement along with New Delhi’s announcement of a second stimulus package on Friday.
While the market’s abstract valuation of wealth soars, the real situation shows that the global economy is in decline. The International Monetary Fund has already cut its 2009 forecast for global GDP growth by 75 basis points to 2.2%. The World Bank says that world trade will fall in 2009 by 2.1%, the first time since 1982. Japan’s monthly industrial output saw a record fall of 8% at the end of last month. Manufacturing in China continues to shrink, with CLSA’s Purchasing Manager’s Index still below 50 for the fifth month in a row (anything below 50 suggests contraction in output). This weekend’s estimates from Bloomberg News bring job losses in the US for 2008 to 2.4 million, the highest since 1945.
Illustration: Jayachandran / Mint
So why is the market so optimistic? Unlike manufacturers and employers who wallow in the misery of the present, the market is supposed to be looking to the future. If we can be permitted to read the tea leaves of everyday movements, perhaps the market has factored in the losses and is anticipating a better year ahead. With a new president in the White House, investors and traders are hopeful. The market believes that Barack Obama’s fiscal spending will stimulate the global economy and save at least three million jobs in the US—perhaps create new ones. Asian economies, heavily dependent on the American consumer, are ecstatic.
We hate to spoil the party, but the market’s bullish stance on Obama is not unlike the faith it showed in real estate finance some years ago. Everyone loves the thought of a new administration, as they did rising housing prices; so, everyone’s happy to join the bandwagon. It’s still unclear what an Obama White House will spend its $800 billion package on. It’s also unclear what this Keynesian pump priming, which increases the budget deficit and possibly crowds out private investment, will achieve.
The market is reacting on sentiment, as it often does. This rally is short-term, and may well collapse once more bad news filters in from the real world.
The new year is a time for new resolutions, and perhaps prudence is how we balance hope and reality.
The new year market rally: hype or for real? Tell us at firstname.lastname@example.org