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Equity resilience is no proof that the worst is over

A partial recovery in US equity markets looks promising. However, as bad economic news flows in there’s still uncertainty on the broader question of whether a market bottom has been reached. Bond yield curves suggest a different story to conventional equity wisdom, which implies investors should now be positioning themselves in mid-recession for a market upturn.

On October 11, exactly one month after the attacks on the World Trade Centre that shut down parts of the financial markets for a week, the Nasdaq Composite stock index returned to its pre-attack level. The Dow Jones Industrial Average had also come back strongly from its low on September 24 but was still 400 points below its close on September 10.

In addition to equity trading recovering, equity underwriting appeared to be back in business in October. September was the first month in years in which no US companies launched an IPO. There were a few follow-ons and convertible deals, but not in any volume.

The fear was that equity capital markets, which had been suffering from reduced issuance in any case following the Nasdaq crash in April 2000, would now be virtually closed. That fear seems to have been unjustified. September was an anomaly - a reaction to the attacks and the huge political uncertainty that followed as much as a business reaction to US stock markets remaining closed for four days and several major investment banks being forced to relocate operations.

Deal flow picked up as soon as October arrived.

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