The last two weeks has seen the biggest bull run on the Dow in 9 years. But are the fundamentals to justify this run really there? There is no doubt the US economy has reached or is getting closer to the bottom but the question remains what happens when it gets there?. The value of the DOW has already rebounded over 40% from its low in March. Analyst seem to like saying that the prices on the stock market run about 12 months ahead of the economy because of its speculative nature. So if this is true, then the speculators out there are showing a belief that once the economy hits bottom there will be a V shaped rebound. I am struggling to find evidence that this will occur.
There is a bit of an attitude going around that that recessions and booms are just part of the natural cycle of things and that one will automatically follow the other, much like the seasons. This of course is a a ridiculous notion as recessions and boom happen for reasons they don’t just happen. The current US recession happened because the fundamentals of the US economy were unsound, the huge budget deficits, imports far exceeding exports and a bloated housing market, all of which required unsustainable amounts of foreign capital to maintain.
So the question remains where is the recovery coming from? Have we learnt that although a consumer, service based economy is fun while it lasts it isn’t sustainable in the long term? Are we introducing new measures to increase productivity? What measure are we introducing to reduce our reliance on imports and increase our exports? Sadly I’m not sure the answers to these questions are anywhere near satisfactory enough to justify the bull run the market is on.
Cheers Craig
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