I think that total capitulation is almost here. It won’t be very long before the heavy selling ends, as a lot of hedge funds have already liquidated some of their riskiest positions. There is the potential for a substantial rally in stock prices over the near term; however, it’s unclear as to whether it will be a dead cat bounce or something else.
The global cooperation that’s taking place amongst policy makers is unprecedented and very much worthwhile. Governments are running out of options in terms of what they can do to affect market sentiment, however, and very soon the marketplace will be totally on its own.
In a sense, we’re all getting a tax cut with the substantial reduction in oil prices. Gasoline and diesel prices are always slower to come down in price, but they will keep trending with the spot price of oil. Other commodities are getting hit hard and agriculture commodities in particular are due for a rebound.
Still, policy makers haven’t really been able to stop the crisis of confidence in the marketplace despite the billions of dollars already spent. The credit crunch among financial institutions is most certainly adding to the problems with the equity market.
I’m worried a lot about what happens next. Let’s say that the credit situation stabilizes and sentiment in all other capital markets stabilizes. What’s going to happen to the stock market?
The main stock market averages have come down significantly and we all know how much money is required to get equity prices to move higher. After this crisis stabilizes, even institutional investors will be gun shy and unwilling to make big bets in the marketplace. This means that the stock market is likely to have a long and difficult road to recovery. It’s just guesswork of course, but given the current state of things, I think it’s going to take many years for stock prices to recover to their previous highs. It might not be a long decade ahead, but it’s going to be long, difficult road.