Skip if familiar with financial terms. If you are not familiar with financial terms, read my short glossary of the key concepts I used in the article:
- Bear market: fall of the stock market as a long-term trend.
- Bull Market: rise of the stock market as a LT trend
- Secondary trend: opposite short-term trend within long-term trend
- Bear market rally: secondary trend in a bear market, meaning temporary recovery in a bear market.
- MSCI / S&P500: Morgan Stanley index and Standard and Poor's 500 index are both indices displaying a general trend of the equity market.
For a more detailed explanation
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Guillaume here. What is the current financial and economic situation? Is March-April a stabilizing recovery? Since the subprime crisis, recoveries have given the same hopes, however since the very end of October 2007, the MSCI World TR has declined by more than 57%, taking into account the latest recovery in the equity market (thanks to the global emerging market, +14,4% in march, the only positive equity market in YTD2009 with +0,9%) impacting S&P500 with a rise of 30% in six weeks. Even though this latest recovery seems like the end of recession, taking a look to previous recoveries might propose a second thought about the nature of the current recovery. Since October 2007, there have been four major recoveries:
- Mid March to mid May 2008: +14%
- End October to Beginning November2008: +21%
- End November to Beginning January 2009: +24%
- Beginning March to mid April 2009: +28%
The latest and actual recovery arises the hope of a long-term bull market when some believe in a bear market rally. However, the bull market requires features that are partially non visible for the moment. Indeed to talk about a bull market, once must acknowledge: market recovery, government policy, asset valuations, investor sentiment, credit extension, earnings growth and economic growth. The last three factors have not yet reached a level corresponding to a long-term recovery, for the actual recovery of April 2009. The shadow of recession still displays rising unemployment (nonfarm payrolls shed 663,000 workers in April, according to a Dow Jones Newswires survey) and decreasing consumption proportionally to increasing savings, credit uncertainty. Despite a positive approach of the 7 factors while still being negative, especially credits, growth and earnings, some of them are tagging along with the hope of a bull market such as the investor's propensity to invest. Not enough data has been gathered to state the trend but the present recovery might also be a secondary trend even though those bear market rallies can last for some time such as the one after the Tech bubble in 01-02. Another point that might comfort us in our secondary trend perspective is the unhealthiness of bonds besides high yields (impacted by the diminishing central banks' rates: US 0.25% - EU 1.25 - Japan 0.10% as of April 09) and property securities (which lost 30% last quarter). Indeed, if the bear market rally was a 3 stage process - where stage 1 would be the general depression feeling, stage 2 the acknowledgement of a bear market rally and stage 3 rush before the recovery ends - the chief investment strategist from Q1 publishing believes we are in stage 2: "It looks like we're in Stage 2. There are just too many non-believers out there right now, too much money on the sidelines yet to come back into the market, and there has been no build up of false confidence which precedes most market declines". Bear market rally or bull market, the impression of recovery is strengthen when even US Junk bonds gain 9.7% in April, investor's confidence is soaring. Only time will determine the trend, though some believe in a real recovery this time, as it can be denoted in this Interesting note quoted from Viewpoint magazine April 2009: " And finally, will the last bear that leave the building please switch off the lights - the bulls are quickest out of the blocks when the market is at its darkest ..."
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Sources:
www.imf.org/external/pubs/ft/weo/2009/01/index.htm
www.wsj.com: Global stock rally is the strongest since 1991, May 1st 2009
www.wsj.com: Stock start month with modest gain May 2nd 2009
Q1 Publishing, Three stages of stock bear market rally, April 20th 2009
Viewpoint Magazine, Focus - March 2009 Review, April 2009
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