« Beware of the sucker’s rally on Wall Street » warns Spencer Jakab in the May 8 issue of the Financial Times:
“The current recovery has propelled the S&P 500 a third above its March low in just 60 days, convincing many skeptics that a new bull market has begun. (However) … most recently, the S&P 500 soared 24 per cent over seven weeks ending in early January, only to plunge to a new low. It was a fairly typical sucker’s rally and bear markets often need more than one to create sufficient disillusionment for a definitive bottom.
The 2000-2002 bear market had three, with average gains of 21 per cent in the Dow Jones industrials over 45 days.
The granddaddy of all bear markets, 1929-1932, had six false alarms with an average gain of 47 per cent. And Japan’s ongoing bear saw the Nikkei rise by at least a third four times in its first four years with 10 more false dawns since then.”
But aren’t the currently low price-earnings ratios indicating that the bottom has been reached? Not yet apparently:
“Professor Robert Shiller (of “Irrational exhuberance” fame) notes that all four big bubbles of the 20th century saw stocks exceed 25 times cyclically-adjusted earnings and trough between 5 and 8 times. On this measure, the 2000 bubble never fully deflated and even the recent low did not breach 11 times.”
And remember that, given the current correlation among world markets, the same conclusion should apply to European stocks as well …
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