With politicians – not economists – saying the economy is fundamentally sound, and things are not as bad as perceived, the stock market has responded positively in the last week. Just to remind you, the stock market is not the economy and in not an indicator of current economic indicators.
Nouriel Roubini, the economist who has been on target with a number of predictions regarding the economic climate, warns about the recent stock market rally:
It is déjà vu all over again. We have already seen this Groundhog Day movie at least six times over and over again in the last year or so: the market starts to rally – this time around about 8% in a week – and the chorus of optimists starts to say that this is the bottom of the economic and financial crisis and that we are at the beginning of a sustained stock market rally that signals the true end of this bear market.
Even before the latest bear market rally started last week I wrote the following on March 2nd:
Of course you cannot rule out another bear market sucker’s rally in 2009, most likely in Q2 or Q3: the drivers of this rally will be the improvement in second derivatives of economic growth and activity in US and China that the policy stimulus will provide on a temporary basis: but after the effects of tax cut will fizzle out in late summer and after the shovel-ready infrastructure projects are done the policy stimulus will slack by Q4 as most infrastructure projects take year to be started let alone finished; similarly in China the fiscal stimulus will provide a fake boost to non-tradeable productive activities while the traded sector and manufacturing continues to contract. But given the severity of macro, household, financial firms and corporate imbalances in the US and around the world this Q2 or Q3 sucker’s market rally will fizzle out later in the year like the previous 5 ones in the last 12 months.
If I was heavily investing, I would take my profits (if I had any) in the current market until the indicators show the economy is turning – not simply reacting to oversold buying.
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- Nouriel Roubini – fourth quarter surge in U.S. economic growth “very dismal and poor”