After a week of eye-popping gains, Wall Street is pondering whether the rebound from a vicious sell-off points to a real recovery from the economic and financial turmoil or a new “bear trap.”
Markets appear to have come to terms with the notion of a recession in the US and global economies, but the key question for traders now is whether the heavy doses of medicine from governments around the world will lead to quick recovery.
The coming week, however, will be marked by the US presidential election on Tuesday and key data, particularly from the struggling auto sector.
The Dow Jones Industrial Average showed a stunning rebound of 11.29 percent for the week, the best since 1998, led by Monday’s 10 percent surge.
But that failed to make up for the panic selling of earlier in the month, leaving the blue-chip index down a hefty 14 percent for last month and nearly 30 percent for the year.
The broad-market Standard & Poor’s 500 index vaulted 10.49 percent on the week to 968.75, but fell 17 percent last month. The technology-heavy NASDAQ composite advanced 10.88 percent to 1,720.95, but lost 18 percent in the month.
The strong gains still left the market deep in the red after one of the ugliest months in Wall Street history.
“Investors were pricing in a very severe recession, if not depression, and right now we’re going through a relief rally,” Standard & Poor’s analyst Sam Stovall said.
“Investors feel that stock prices might have overdone it to the downside,” he said.
Joachim Fels at Morgan Stanley said authorities in the US and elsewhere are taking the aggressive actions needed to stem the crisis, including interest rate cuts and moves to pump vast amounts of liquidity into the financial system.
“In our view, even highly unorthodox measures such as zero interest rates, direct central bank lending to the private sector, heavy government interference with private banks’ lending policies or large-scale bank nationalizations cannot be excluded,” Fels said.
“In short, we believe that the authorities will do whatever it takes to prevent a depression,” he said.
“While a global recession appears unavoidable, we believe that markets have gone too far in pricing in a multi-year deflationary outcome,” Fels said.
Christine Li at Economy.com said markets were more focused on central bank actions to cut rates around the world, on top of a variety of initiatives to ease a global credit squeeze.
Bonds fell over the week as investors appeared to take a bit more risk.
The yield on the 10-year Treasury bond rose to 3.970 percent from 3.697 percent a week earlier, and that on the 30-year bond increased to 4.369 percent against 4.087 percent. Bond yields and prices move in opposite directions.
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