Reply #26: Roubini: Last Legs of the Stock Market Sucker's Rally [View All]

The Bernanke Put and the Last Legs of the Stock Market Sucker's Rally
Nouriel Roubini | Nov 29, 2007

How sharply will the US stock market fall if the US experiencees a recession? Given the recent flow of very negative macro news, the likelihood of a US hard landing has sharply increased; thus, it is important to assess the implication of such growth slowdown, hard landing or outright recession on the stock market.

It is true that in the last two days the US stock market has recovered sharply after a significant 10% downward correction in the period from early October until Monday. But the most sensible interpretation of the upward move on Tuesday and Wednesday this week (in spite of an onslaught of lousy macro news: consumer confidence, existing home sales, Beige Book, fall in durable goods orders, regional Fed manufacturing reports, initial claims for unemployment benefits, expectations that Q4 growth will be closer to 0% after the revised 4.9% in Q3, sharply rising credit losses, falling home prices and a worsening housing recession, etc.) is that this is the last leg of a sucker's rally (or dead cat's bounce) driven by wishful hopes that the Fed easing will prevent a recession.

So beware of the large amount of spin that is being peddled today by bulls that are now starting to recognize that a recession is likely: they need to spin the bad news about the economy as suggesting that such bad news are actually very good news for the stock markets or that the Fed will be able to prevent such a recession. For these perma-bulls good economic news are very good for the stock market and bad economic news are also very good for the stock markets as the reaction (“I guess it is probably a buying opportunity”) to my recession call by the Squawk Box anchor interviewing a while ago suggests. But savvy investors will not let themselves to be fooled by such non-sequitur arguments and will cautiously adjust their portfolio to reduce the risk of being stuck in a bear market when the recession actually gets under way.


lots more, charts too
http://www.rgemonitor.com/blog/roubini/229403

edit to add:
The charts present the percentage change in that S&P500 index around the last six U.S. recessions (i.e. starting with 1970), i.e. in the months before the start of a recession, in the months during a recession and in the months after it. The vertical lines in each charts represents the peak of the business cycle (i.e. the beginning of a recession) and its trough (end of a recession). On average the stock market does not change much between the peak and the trough of the business cycle: on average the fall is only 0.4% between peak and trough; in some recessions – such as the 1974-1975 one - the peak-to-trough fall is much deeper (-13%) but in others – such as the 1980 one – stock prices actually rose 5.8% between peak and trough; so -0.4% is an average for all recessions.