Boom2Bust.com

While Wall Street Celebrates, Others Warn Of Severe Recession Ahead

One look at what happened on Wall Street today, and you’d think all is well again. From MarketWatch’s Kate Gibson this afternoon:

U.S. stocks sprang higher on Monday as widespread buying fueled the Dow Jones Industrial Average’s greatest intraday point gain on record after a frantic weekend of international government actions bolstered confidence in the banking sector and credit markets. The Dow Jones Industrial Average gained 936.42 points, or 11.1%, to end at 9,387.61, its greatest daily point jump ever and its 5th-largest daily percent gain. The S&P 500 rose 104.1 points, or 11.6%, to end at 1,003.32. The Nasdaq Composite (climbed 194.75 points, or 11.8%, to end at 1,844.25.

A renewed sense of calm also lessened investor appeal for traditional safe-havens. MarketWatch’s Morning Zhou wrote:

Gold futures fell for a third session Monday, closing at the lowest level in more than a week as government agreements reached in Europe and the U.S. to support the banking sector dampened safe-haven demand… Gold for December delivery fell $16.50, or 1.9%, to end at $842.50 an ounce on the Comex division of the New York Mercantile Exchange, the lowest since Oct. 3.

There were even some analysts who appeared to exhibit this new-found confidence. Bloomberg’s Elizabeth Stanton wrote:

“The worst of the immediate danger is past,” said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland, which manages $30 billion. “It’s always easier when you’ve got markets going up and you’re not having to talk clients back in off the ledge.”

Note the use of the word “immediate.”

While it was easy to get caught up in today’s turnaround on Wall Street, it may be wise not to look too deeply into it for a sense of where the market, or the U.S. economy (see “Wall Street As An Economic Barometer”), is heading in the longer-term. After all, who’s not to say it was simply a bounce from over-sold conditions. The Wall Street Journal’s Peter A. McKay wrote:

“The danger here is that people will be lulled into the idea that a strong bull trend is now in place rather than the idea that the market is just bouncing off a short-term oversold condition,” said Michael Darda, chief economist at MKM Partners, a trading and research firm in Greenwich, Con.

Looking at the bigger picture, today’s celebration cannot mask the threat of economic recession for the United States. Earlier today, Bloomberg’s Rich Miller talked about this risk for recession, and those in the financial community who think we’re headed for a particularly nasty one. From Miller’s piece:

It’s hard to imagine it not being the worst recession in at least 25 years.

-Kenneth Rogoff, Harvard University economic professor and former IMF chief economist

It’s certainly going to be the worst since the 1980s. The hope is that it won’t become the worst unemployment business cycle since the Great Depression.

-Bradford DeLong, University of California at Berkeley economics professor who worked at the U.S. Treasury from 1993 to 1995

This is the worst crisis I’ve seen in my 50-year career. We still have to deal with the effects on the real economy here and elsewhere.

-William Rhodes, Citigroup senior vice chairman

And as I was writing this post this afternoon, MarketWatch’s John Letzing reported:

A Citigroup analyst late Monday issued a dour outlook for the U.S. economy, writing in a note to clients that the recent crisis has “broken the bounds of any previous, merely cyclical event.” Citigroup analyst Steven Wieting wrote that tightening financial conditions and weakening economic activity are expected to continue, and suggest “a more severe recession.” Wieting wrote that even if “traction is eventually regained,” he is nonetheless expecting contraction in the U.S. GDP over the four quarters ending in the second quarter of 2009. “We believe large company profits will now fall 27% peak-to-trough, and the unemployment rate to peak above 8 1/2%,” Wieting wrote.

Everyone loves a party, but as most of us know, parties weren’t meant to last.

Sources:

“U.S stocks snap 8-day losing streak; major indexes up 11%”
Kate Gibson
MarketWatch, October 13, 2008

“Gold falls as rescue plans reduce safe-haven buying”
Morning Zhou
MarketWatch, October 13, 2008

“U.S. Stocks Rally Most Since 1930s on Bank Plan; Dow Gains 936”
Elizabeth Stanton
Bloomberg, October 13, 2008

“Dow’s 936-Point Surge Ends Losing Streak”
Peter A. McKay
Wall Street Journal, October 13, 2008

“World May Be Lucky to Get Worst Recession Since 1983 (Update3)”
Rich Miller
Bloomberg, October 13, 2008

“Citi analyst issues dour outlook for U.S. economy”
John Letzing
MarketWatch, October 13, 2008