This morning’s bounce in the Wall Street indices confirms that investors think the global recession is all but over.
Markets had been getting the shivers about the big correction unfolding in Chinese stocks, but even though the Shanghai market headed into technical bear market territory yesterday (down 20%), the US market has kept its mind on matters closer to home and the signs of economic recovery.
This morning it’s the oil price going up 4%, although that may be caused more by a supply shock than demand growth.
Anyway, stockmarkets tend to bottom between four and six months before the economy, and never more than eight months before. Since the market bottomed in early March, the global economy needs to start growing again pretty soon, as opposed to levelling out, or investors are going to be very disappointed.
A new survey this morning from Bank of America/Merrill Lynch Research shows that 75% of investment managers believe the world economy will firm up in the next 12 months, the highest reading on this question since 2003, and a net 70% of respondents expect profits to rise in the next year.
More and more economists are now pronouncing that the cycle has turned, although it’s hard to know whether this is circular logic – that they are responding to the market and the market responding to them.
The New York Times points out this morning that Alan Greenspan has been known to watch sales of men’s underpants as a good economic indicator – they’re usually extremely consistent, but when sales dip, and men decide to stick with their old tatty ones for a while longer, he knows the economy is in real trouble. In this recession the dip has been very small apparently, and is now over.
On a more conventional note, the Economic Cycle Research Institute has reported that its weekly leading index is surging, with the annualised growth rate at a 26 year high. Lakshman Achuthan, the head of ECRI, commented that: “The odds are rising that the early stage of this economic recovery will be stronger than any since the early 1980s.”
In the United States the authority on these matters is the Business Cycle Dating Committee, which is part of the National Bureau of Economic Research. The head of the Dating Committee, Robert Hall, said overnight that his group will be waiting for “activity to surpass its previous peak”.
Hall added: “The committee will have to reconcile positive GDP growth with shrinking employment…I personally put substantial weight on employment, so I may be leaning toward a later date.”
The latest data we have this morning is somewhat historical: an OECD report on the second quarter of 2009. It showed that the OECD economies flatlined in the quarter (zero growth), after the 2.1% crunch of the first quarter and 1.9% contraction in the December quarter of last year.
But these numbers are not only old, but also have all previously made public.
In my view the key concern now for global markets is not whether the US economy has bottomed, but whether the Chinese authorities over-react to the gathering signs of a remarkably strong recovery in that country.
That fear is why Chinese stocks have fallen 20% in a fortnight (along with the fact that they went too high, of course).
Morgan Stanley’s economists say that while the “end of easing” may well have begun in China, a large gap is likely before the “beginning of tightening”.
Without that, the correction in Chinese stocks is unlikely to turn into a full rout and therefore won’t damage the emergence of a new bull market.
This article first appeared on Business Spectator.
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
