The US stock market reels. Europe cringes at the prospect of serial defaults by Greece, Portugal, Spain and Italy. A computer glitch triggers a near-crash on stock exchanges. Rules for financial firms in the US are being overhauled. North Korea and South Korea rattle sabers.
No wonder investors’ stomachs are jumpy. Yet, in my opinion, things are not as bad as they seem.
The stock market correction that began on April 23 in the US has carried the Standard & Poor’s Stock Index down more than 10 per cent. A decline of 10 per cent or more occurs, on average, once every 11 months. Let’s examine the anatomy of this correction, looking for indications of its severity, duration and nature.
This is an international market dive. Since April 23, benchmark indexes have fallen about 11 per cent in the UK and France on a total return basis. Germany has held up slightly better, down about 7 per cent.
As I see it, Greece’s problems are more of a morning-after hangover from the worldwide recession than a harbinger of new ills. The index of leading indicators in the euro region rose every month from March 2009 through March 2010.
More pep
So, it’s likely that the economies of most European countries will soon start showing more pep. Meanwhile, the recovery in the US seems to be accelerating. Corporations are reporting higher earnings, gross domestic product has risen three quarters in a row, and the leading indicators point to more improvement ahead.
I expect the US unemployment rate, 9.9 per cent as of April, will start declining soon — to less than nine per cent by the fall.
The sudden stock crash of May 6, in which the Dow Jones Industrial Average plunged about 1,000 points in minutes, only to make up most of the ground before the day’s end, was unsettling. Bear in mind, however, that a 1,000-point decline in the Dow today represents a loss of about 10 per cent. When the index dropped by 508 points on October 19, 1987 – now known as Black Monday – it was a loss of more than 22 per cent. I am no more adept at predicting the stock market than many other people. To mangle an old song from a James Bond movie, “Nobody does it better, but nobody does it very well.”
Prediction
For what it’s worth, here is my prediction: I think the current correction has almost run its course and will end within a week in the US and within a month in Europe. My guess is that the S&P 500, which started this year at 1,115, will end 2010 ahead by 10-15 per cent. That would put the index at about 1,226 to 1,282.
The author, chairman of Thunderstorm Capital in Boston, is a Bloomberg columnist
