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WORLD MARKETS EYE RECOVERY

Posted by Gilmour Poincaree on December 15, 2008

Dec 14 2008 17:07

Agence France Presse

PUBLISHED BY ‘NEWS24.COM’ (South Africa)

New York – After a catastrophic year in which Wall Street lost five years of gains, investors worldwide are looking for a possible market bottom but remain cautious in the face of a deep economic crisis.

Global markets are assessing the damage of a calamitous year that has sapped 40 percent or more from many stock market indexes.

As of December 12, the broad-market Standard & Poor’s 500 index was down a stunning 40%, but has been as much as 52% below its all-time peak in October 2007, marking the worst bear market since 1931, according to S&P.

The Dow Jones Industrial Average of 30 blue chips has lost 34.9% and the Nasdaq composite has fallen 41.9%.

Other markets around the world have fared worse including the Paris CAC 40 (down 42.7%) and Japan’s Nikkei (46.2%), while London’s FTSE has tumbled 33.7%).

Art Hogan, analyst at Jefferies, said the year saw devastation on a historic scale.

“It’s literally as bad as the market can get, in every shape or form: losses of jobs, economy, devastation in equities and residential real estate,” he said.

The market also witnessed “devastation in brand-name firms being thrown out of the way like Bear Stearns and Merrill Lynch and AIG and Freddie Mac and Fannie Mae.”

Because of the unprecedented losses, Hogan said the feeling is that “next year has got to be better.”

Investors bruised by the worst losses in decades are trying to determine whether the worst is over or if what seems like a rebound will end up being a “sucker rally.”

Large margin for error

Sam Stovall, an equity strategist at S&P, said he sees a likely recovery from oversold conditions in 2009.

“There is a good chance that we could be seeing a bit of recovery next year but I still think what I would call a range-bound recovery,” he said.

Lewis Alexander, chief economist at Citigroup, pointed out that “given the forces at work in the global economy, however, any forecast must entail an unusually large margin for error.”

Alexander said the problems are compounded by the so-called “negative feedback loop” – falling share prices mean falling wealth, dampening consumer spending and investment, leading to job cuts and lower output that reinforce the cycle.

“Since their peak over the summer, global equity markets have lost about $25 trillion in value. This represents about 40% of global GDP,” or gross domestic product.

Wall Street and many other markets have slid to their lowest levels since the bear market of 2002-2003. The Dow index has essentially pulled back to its levels of a decade ago.

Things could still get worse. But many analysts are banking on a “bottom” that will allow markets to recover even if the economy is still sputtering.

“It might be that the 40% decline over the past year has already factored in much of the bad news already,” said Paul Nolte, analyst at Hinsdale Investments.

“Unfortunately stocks won’t be waiting for the economy and will rise anticipating the end of the worst,” he said in a note to clients.

Fred Dickson, equity strategist at DA Davidson, said market sentiment may be recovering from its depths, helped by the vast array of actions by the Federal Reserve and US government and its counterparts around the world seeking to jolt life back into the moribund economy.

Meltdown not over

Dickson said the market “may have seen its psychological low point back on October 15″ before the bulk of rescue efforts were announced, but that investors may not yet be out of the woods.

“We believe an optimistic estimate would be that the economy bottoms out next summer,” Dickson said.

“We don’t see the market as being ready to lift off into the next big bull market. Stock prices continue to be very attractively priced, but could become more even attractively priced if the economy suddenly takes another big dip.”

Yet there is no shortage of doomsayers arguing that the meltdown is not over.

Bennet Sedacca of Atlantic Advisors said he believes things will get much worse due to a dysfunctional financial system.

“The problem as I see it is that unless the (US) Treasury wants to back the entire credit market, we are simply delaying the inevitable failures that are to come,” he said.

Sedacca said he sees “investable levels” coming with the S&P 500 “yet another 40% to 50% lower.”

Bill Gross, a respected bond fund manager, also argues for caution.

“Stocks are cheap when valued within the context of a financed-based economy once dominated by leverage, cheap financing, and even lower corporate tax rates,” he said.

“That world, however, is in our past, not our future. More regulation, lower leverage, higher taxes, and a lack of entrepreneurial testosterone are what we must get used to.”

CLICK HERE FOR THE ORIGINAL ARTICLE

PUBLISHED BY ‘NEWS24.COM’ (South Africa)

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