Stock markets are plunging today supposedly in response to uncertainty over the Paulson bail out in the US. Actually that is not true. As I have said before, for the past couple of years stock markets have been wildly over-priced and blindly optimistic about economic prospects in 2008 and 2009. The real estate markets have been correcting for a couple of years already, the credit markets have been in severe contraction for over a year already. The stock markets of the world have been slow to get it and are now rather violently having to concede reality. Stock investors have been slow to wake up. There is an old adage in finance that the bond markets are driven by the brains, while the stock market is driven by hair brains. The adage is seemingly accurate this time again.
Recently I have seen many comments expressing a belief that governments will step in any day now and stop market declines: “they won't let the stock market go down, they won’t allow it.” Sorry folks this thinking is a fool's folly. The truth is the governments are not in charge of the stock market. It is not even meant to be on their radar.
Recent emergency government efforts are focused on trying to shore up the banking system. They are not meant to save stock investors. Stock investors are on their own. And those that did not realize that before today, are suffering greatly through this. The present downturn is the most serious global financial and now economic crisis that we have seen in decades. Once the economic contraction begins to abate, and the next bull market does begin, it is likely to take years before stock and commodity markets will retest the highs of 2007. This is just how market cycles work.
Meanwhile there was an excellent article by James Galbraith (yes John's son) in the Washington Post this weekend. Apparently he too sees green technology as the next growth area that North Americans can peg our economic recovery too. See “A Bailout we don't need” for some wise perspective.
The Canadian market had its biggest decline today since October 2000. But we should recall that October 2000 was not the end but only the start of the 2000 to 2002 bear market in stocks. It is very likely that today will not be the end of this bear market either. Having lagged this global downturn to date, I suspect that Canada has more catching up to do on the downside.
Cory’s Chart Corner
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