Wall Street’s stunning comeback from 12-year lows over the past week has sparked some hope for battered investors, but whether the rebound is genuine remains a topic of heated debate.
Some market watchers say a positive outlook from the battered banking sector and tentative signs of stability in some economic reports suggests the worst may be over for the economy and the stock market.
“Stocks have come a long way in a few days,” said Al Goldman, chief market strategist at Wachovia Securities. “The market has already discounted almost every conceivable problem. Thus, any additional evidence that the economy is close to bottoming will keep this market headed higher into year-end — we believe the economic storm is at its peak and will soon begin to moderate.”
The Dow Jones Industrial Average of 30 blue-chips surged 9.0 percent on the week to end Friday at 7,223.98, roaring back from a 12-year low. The broad-market Standard & Poor’s 500 bounced back from a nearly 13-year low, rallying 10.7 percent in the week to 756.55.
The technology-heavy NASDAQ composite climbed 10.6 percent over the week to end at 1,431.50.
Despite the snapback, the Dow index is down 17.7 percent for this year, with the S&P off 16.2 percent and the NASDAQ 9.2 percent.
With a bear market still in force, many analysts say caution is warranted.
“For the time being, we continue to believe the stock market indices will remain volatile with sharp rallies being followed by corrections as market sentiment continues to be shaped by the daily economic, corporate and political news flow,” said Fred Dickson, strategist at DA Davidson & Co.
Dickson said until the market breaks out above the current trading range, “we will view the market action as a very welcome bear market short-covering rally rather than the beginning of the next long-term bull market.”
More pessimistic, economist Nouriel Roubini of New York University said there was a chance the global recession deepens into a depression, which would make the latest rebound another “sucker rally.”
“If a near depression were to take hold globally, a 40 to 50 percent further fall in US and global equities from current levels could not be ruled out,” Roubini said.
Kent Engelke, chief economic strategist at Capitol Securities Management, said he saw a possible upside surprise.
“Is this rally sustainable or is it just a dead cat bounce?” he said. “There is almost a 100 percent consensus that it is the latter and the lows will be revisited in short time, a pattern steep in precedence of the last 18 months.”
But he argued that “it has been my experience when everyone expects something to happen normally the inverse occurs.”
“I believe if the financials are indeed stabilizing and if there is a change in mark to market accounting, the odds are significant that we have experienced this cycle’s lows,” he added.
Sherry Cooper, chief economist at BMO Capital Markets, said two bits of news on the regulatory front have also brightened the mood.
She said officials and lawmakers seem to be moving toward easing the “mark-to-market” accounting rules that require banks to recognize losses quickly instead of holding them to await a recovery.
Bonds fell in the week. The yield on the 10-year US Treasury bond rose to 2.918 percent from 2.828 percent a week earlier and that on the 30-year bond increased to 3.671 percent from 3.503 percent. Bond yields and prices move in opposite directions.
The economic calendar in the coming week is light, with data due on housing starts and consumer prices. More significantly, the US Federal Reserve opens a two-day meeting on Tuesday expected to signal its intent next week to act even more aggressively in opening up credit markets to spark recovery from recession.
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