Wednesday, July 22, 2009

Global equities rise $13 trillion from March lows

Maybe it's just a "dead cat bounce," but I'm very impressed by the rebound in risky asset prices. The market cap of the global equity market has risen fully 50% from its March 9th lows (vs. 41% for the S&P 500), or $13 trillion in less than 19 weeks. In retrospect, this looks like the "panic rally" that I started talking about in late December and early January. Except that I was a couple of months early in the call, and I missed the Obama-panic selloff of February and early March.


Jake said...

So the sell off was due to Obama and the rebound had nothing to do with Obama.... Got it.

Scott Grannis said...

I've commented on this before. I think the rebound had a lot to do with Obama. When his agenda started to run into opposition, when cap and trade looked like it wasn't going to fly, when his popularity started declining, etc.

Rob said...

Scot, so if it was a "panic rally" where does it go from here? Panic implies it was perhaps overenthusiastic and thus it might need to retrace down a bit and then stagnate or what? Thanks

Scott Grannis said...

If I recall, my thinking back then was that the market was pricing in an absolutely disastrous economic scenario: something much worse than the Depression. I couldn't imagine even another Depression, much less a mega-depression. So I thought that as time went by and a mega-depression failed to materialize, or if the economy just looked to be in a bad recession, then the market would have to move higher. And considering all the money the Fed had added to the system, and the fact that money market rates were nearly zero, and all risky assets were extremely cheap, then it seemed plausible to me that the market would have to correct upwards by a lot.

Now we're about 5% above year-end levels on the S&P 500, so that doesn't really amount to a panic rally. But we're up 40+% from the March lows, when the market was basically pricing in a "end of the world as we know it" scenario. That is not what is happening, and so the market has "panicked" and corrected what was in effect a severely oversold condition.

I still think the market is priced to an economic outlook that is much worse than what I am seeing. I think there is some decent upside left, even if the economy only manages to grow 2 or 3%.

Now, if Obama's agenda really gets pounded, and if the stimulus is recalled and replaced with some genuine tax-cutting stimulus, then we could see a monster rally. Not sure that will happen, but my point is that the market is still vulnerable to the news being less bad than expected. That's the driving force behind what looks to be a "panic" rally. "Ohmigod, we're not going into a mega-depression, and here I am with all this money in cash earning zero!"