If the Dow can rise 540 points in two days - as it did last week - there is something rather odd going on, says Tony Jackson in his On Monday column in the FT.
Most equity markets are still higher than at the start of the year, he notes, which seems logically justifiable only on one of two premises. Either the credit crisis has turned out to be less serious than expected, or other unexpected good news has more than offset it.
The first isn’t plausible. So what about the second? Mining’s run, up 50 per cent worldwide, implies not just that high growth countries such as China are unaffected by the crisis, but that their prospects are somehow strengthened. Which makes little sense to Jackson.
One stock answer to all this is that the market is a discounting mechanism, which takes a two to three-year view. Thus, this year’s bad news was already in the price, and investors are now looking to the sunny uplands of 2010.
That argument was neatly stood on its head recently by Morgan Stanley’s European strategy team. Suppose three years ago, they said, you had been given the following scenario for November 2007: oil close to $100 a barrel, the dollar at $1.50 to the euro, corporate profit margins at a record high but starting to turn, house prices falling in the US and the UK and the global banking system in chaos. Would you have predicted that European equities would be only 6 per cent off their peak?
Jackson’s glum conclusion is that equity investors are still in denial. The governor of the Bank of England recently remarked that the prospect of a fall in equities was at least as worrying as the credit crisis and he finds it hard to disagree.
