Against the tide: The bear market sets in
There will be more rallies but the equity market trend is downward, and there’s a worrying backdrop of rising inflation mixed with declining growth.
Global equities are in a bear market. But that does not mean that equity prices will just go down in a straight line. There have already been rallies and there will be more before equity markets reach a bottom. Indeed, I expect a large rally is now in the offing.
For instance, on March 17, the US Federal Reserve announced that it had arranged to bail out collapsing investment house Bear Stearns, with JPMorgan buying the company for $2 (ultimately $10) a share. That was the signal for a global equity market rally.
The Fed had acted to avert a systemic financial crisis and, as Lehman’s chief executive, Dick Fuld, put it, "the worst is behind us". The consensus was that the credit crunch would now dissipate and that the economy would avoid a recession.
Equity markets continued to rise until mid-May. After that, though, they tumbled back, so that the MSCI world index is now below that March low. Indeed, global equities are now down 12% year to date and around 20% from the high of October 2007. The global index is now at its lowest level since October 2006. The equity bear market is confirmed.