By Paul Maidment
January 21, 2008
In the perennial struggle in stock markets between fear and greed, fear is currently clearly in the ascendancy.
World stock prices have fallen 16% since their high point last October and Monday's falls on Asian and European markets--in the order of 4%-7% on the day--were the sharpest in some markets since the terrorist attacks on the U.S. of Sept. 11, 2001.
U.S. markets were closed on Monday for a holiday, so Asian and European markets will have another uneasy trading session to weather before New York weighs in with a verdict of what this all means.
Trading in stock futures, though, suggests more bull's blood on Wall Street Tuesday. If U.S. stocks open at the levels futures are indicating, it would push the main indexes close to the 20% drop from their peak in October that would formally mark a bear market.
It is always a mug's game trying to pinpoint the reason for a market's fall beyond the obvious one that there were more sellers than buyers. Certainly, on Monday trading was thin, not untypical for a heavy down day, and much selling was futures driven and by program trading from hedge funds--i.e. done by machines with direct market access, that, though unable to feel either fear or greed, are adept at amplifying either blindly.
But among flesh and blood investors, it is equally clear that fear of a U.S. recession that would brake global growth is taking a tighter hold, in the wake of the sub-prime mortgage mess and housing slump in the U.S.
The trigger for Monday's fall, in a widely given explanation, was that Asian and European investors were underwhelmed by the stimulus package the U.S. administration had announced last week. But so, too, were American investors, who knocked 178 points off the Dow on Friday, so it shouldn't have been much of a surprise that the rest of the world took the same view.
But what has changed is that equity markets, which have vacillated since hitting their highs last year, have fallen in line with the gloom that has pervaded credit markets for some months. All of a sudden every glass looks half empty to stock investors.
Word on Monday that the Bank of China may write off as much as $1 billion in sub-prime related losses only reinforced investors' fears that the the sub-prime fall-out has much further to go--even though investors have already wiped more off the market capitalization of the big banks involved than those banks have written down for sub-prime mortgage related losses.
An understanding of the potential impact of the crisis among U.S. bond insurers, notably Ambac, is dawning on investors outside the U.S.--financial stocks led Monday's sell-off. (See " Bond Issuers Face New Costs In Insurance Crisis.")
There is less confidence suddenly in the underlying resilience of the U.S. economy to avert a recession. This is despite the Federal Reserve's professed readiness to cut interest rates, as low as the 2.5% on the Fed Funds rate that's been widely predicted. (It will be the Fed, not any tax-cut driven package that will provide the near-term stimulus to the U.S. economy).
There is also less confidence in the vibrancy of consumers in emerging Asian economies, particularly China, and their ability to take up the baton of growth from their weary, tapped-out American counterparts. It has been the willingness of Americans to go into hock to keep buying Asia's imports that has been the global economy's engine of growth this cycle, as much as the M&A-fueling liquidity sloshing around the world.
The underlying questions remain, though, are we facing a slowdown or a shrinking of the U.S. economy, and how long will whichever comes to pass last? Economists at Citigroup have just cut their growth forecast for the U.S. economy for the year to 1%, with gross domestic product contracting in the first quarter. But still growth.
Optimists still standing after Monday can draw further hope from the observation by the World Bank in its latest Global Economic Prospects, that emerging economies are showing notable resistance to the U.S. slowdown. Credit spreads are holding.
The bank forecasts growth in developed economies at 2.2% his year, but at 7.1% on average in developing ones. That would pull the global economy through its current financial troubles.
In one sense, what we are seeing is the start of the unwinding of the global imbalances--America's deficits, the surpluses of the oil and export producing nations of Asia and the Middle East. It will not happen either quickly or smoothly, and it will not happen to a timetable over which government's and central banks can hold much of a sway in the near term.
In the meantime, global equities will continue to have a time as miserable as investors' fear.
Source: Forbes.com
Stock Investors Suddenly See Every Glass Half-Empty
