Will the fastest rise in the S&P 500 since the mid-30s also end in a 1937 crash?
Posted on 20 February 2011 with 2 comments from readers
Last week the S&P 500 traded at double its March 2009 low of 666, the devil’s bottom, the fastest recovery seen since the mid-30s as a Wall Street Journal op’ed was quick to point out. Back then it took 501 days compared with 707 days for the current rally.
But as our friends from The Daily Reckoning so astutely note, this was not the full story. For that you need to look at what came after the rally:
What goes up always has to come down eventually in stock markets. The Dow Jones still has some way to go before it doubles from its bottom of 6,547 two years ago.
Same old story
ArabianMoney would simply note that the self-same constellation of bear factors that brought the US markets to their knees in 2008-9 are rearing their ugly heads again. Oil above $100 could easily spike beyond the previous $147 high seen in July 2008 that kicked the US subprime crisis over the cliff.
That old subprime crisis has not gone away either with foreclosures set to surge again this year, and house prices still falling. Meanwhile, the euro zone sovereign debt crisis adds a whole new level of uncertainty to the global banking system, and Japanese debt is also at a tipping point.
Indeed, if you had to sum up the downside risk to global equities in a nutshell it would be inflation and interest rates. Chinese equities responded negatively to a tightening of its bank lending last week after a surge in official inflation rates to near five per cent.
Tipping point
At what point do Western equities also tip over the edge again? Presumably when investors wake up to the horrible reality of what lies ahead and stop jumping at every tiny indication of recovery.
It would be surprising indeed if with all the money that has been pumped into the system it did not show some signs of an upturn. But the issue is surely that the recovery that we are getting is not nearly as big as all the money being pumped into the economy, and that really is a problem.
Bond markets are already weakening, with yields rising when the QE2 program is supposed to push them down. Interest rates and inflation are on the way up, and sooner or later stocks will have a 1937 moment again.
How can investors position themselves to make money when this happens? Read the next issue of the ArabianMoney newsletter (sign-up here).
2 Comments posted by readers:
S&P 500 seems quite bullish regardless of all this bad news in the middle-east while Dubai’s Index is taking a beating this morning in Dubai.
From an investment perspective, we are living in interesting, as well as dangerous times. Metaphorically, if we scan the global horizon, there is nothing but “bad news”, yet one has to give “credit” to the Bernank for his magnificent manipulations of the stock and bond markets, preventing them from reacting to all the negative news.
But it’s not just the stock and bond markets that have been manipulated; commodities, currencies, etc. as well, all of which has been executed by the central bankers around the world and orchestrated by none other than the Maestro himself, Mr. Benjamin Bernanke.
With the advent of inflationary food prices (from the many trillions of USD that have been thrown into the global system), civil unrest, revolutions, killing of innocent civilians, etc., one has to wonder how much blood is on the hands of these central bankers and their agents, JPM, GS, HSBC, DB, etc. etc.