August 29, 2009
Wall Street faces an interesting few weeks as commentators debate whether the recovery in the Dow Jones average this year is the start of a new bull market or heading for a fall.
Since the beginning of March, when the Dow Jones average hit a multi-year-low at 6,547, the index has increased more than 50 percent.
"To a certain degree, the market is perhaps sitting on the head of a pin. The market could easily be moved one way or the other," Theodore Weisberg, a stock trading veteran with Seaport Securities, told Xinhua earlier this week.
The Federal Reserve Chairman Ben Bernanke claimed the economy was "on the verge of recovery" last Friday. However, Nouriel Roubini, the New York University professor who predicted the financial crisis, said the chance of a double-dip recession was increasing because of risks related to the ending of global monetary and fiscal stimulus programs.
According to Weisberg, "The obvious answer is perhaps Bernanke is correct, which is being evidenced by the continuous strength in the stock market. We know that the stock market is a leading indicator, not a trailing indicator. It tends to look ahead three, six or 12 months. The tape simply says, I think, that it is looking ahead at an improving U.S. economy.
"But on the other hand, the financial press have had many stories about perhaps the market has in fact got away ahead of itself. The economy really is not as robust as we like to believe," he added. "It's a bit of dilemma."
Despite the signs of recovery, some analysts hold that the economy is still fragile, noting that a number of companies have been able to report better-than-expected earnings in the first half-year in large part because of aggressive cost-cutting measures and outsourcing, not stronger sales. Revenue is still sagging as consumers forgo spending to shore up their savings.
The stock market surge was not only based on positive economic fundamentals and corporate earnings, but also driven by excess liquidity, said Li Shanquan, vice president of OppenheimerFunds Inc.
The Bush and Obama administrations launched enormous economic stimulus plans to free up the frozen liquidity, which was caused by the worst financial crisis since the Great Depression. Partly because of these aggressive efforts, there are some signs that the economy has stabilized. Meanwhile, the massive money flow poses inflation threats and other side-effects.
The Federal Reserve faced a tricky balancing act ahead: how to make sure an economic recovery gains needed momentum, while guarding against inflation or another bubble-induced crisis, Li pointed out.
Warren Buffett, one of the most successful investors in the world, expressed worries in a recent article in the New York Times: "The threat of inflation may be as ominous as that posed by the financial crisis itself."
The Federal Reserve's recent policy statements implied that its short-term interest rate for banks will remain near zero percent, probably into next year and Obama's decision to renominate Bernanke Tuesday shows the president has opted for continuity in U.S. economic policy.
"But the policy may change sooner or later. As many countries will seek to reverse their economic policies, the financial marketwill probably take on fluctuations in a large scope," said Li.
Weisberg says: "The market wants to do better and perhaps the economy is improving. But we are certainly technically overbought. We are due for a correction and it's not going to take much to get that correction, the real test for all of us will be when we get that sell off and we will get it."
"I would agree with those traders that say that September is problematical. Something about the fall (September and October) basically tends to make the market very nervous. Also bear in mind, October is the end of the fiscal year for a lot of mutual funds. So there tends to be a lot of window-dressing in October," he added.