Are we revisiting the past?

Are we revisiting the past?

By: Mike Wright

Last week the 20 year anniversary of the 1987 crash passed with a significantly negative close for all major stock markets.

A sell off, but it was some way off being a repeat of that day 20 years ago that wiped off 12.2% of the value of British shares in one trading session. It is interesting to note that neither the 1987 or 1929 crashes led to a recession and the Dow actually finished up for the year after the ’87 crash. Indeed as of the time of writing the Dow Jones Industrial Average is up 700% from its 87 crash low.

The Nasdaq was again the strongest market relatively (although that wasn’t saying much after Friday’s rout). Google yet again beat analyst’s estimates with increased revenue coming on steam from acquisitions such as You Tube. They now handle 57% of all web searches which is twice as much as Yahoo, their closest competitor.

Despite the strength in the new economy, the bears have plenty of reasons to fuel the selling we saw on Friday. Oil hit $90 per barrel for the first time ever, Gold continues to surge and the US Dollar hit and all time low against the Euro. Banking stocks fell hard amid concerns that the credit crunch may have even more profound and lasting effects than originally feared. Bank of America reported trading losses brought on primarily by the credit crisis. Despite soaring energy prices, it was the energy giants and oil service handlers that fell hard on Friday due to fears over future earnings. Their sector’s weighting in the main indices may have magnified the overall slump.

Two year US treasury notes recorded their biggest weekly gain since 2002 as traders priced in a 70% chance of another Fed cut while the ECB came until renewed pressure from politicians to relax their tightening bias.

For the moment though, US consumers in particular may not feel the immediate pinch of the record oil prices. Mark Zandi of Moody’s Economy.com (source CNBC) found that the current oil price is actually $11 below the inflation adjusted high of $101.70. In addition, adjusting for inflation consuming spending is 3% less than in 1980, household income up 42%, median house prices up 40% and pump prices up just 1%.

So in the short term US consumers may be able to weather this storm, but if this price pressure persists coupled with an ever worsening housing market then the lifeblood of the US economy, the consumer will eventually have to tighten their belts.

Wednesday and Thursday’s home sales data will help us see how far down the line this scenario actually is. Thursday’s crude oil inventories could have a disproportionate effect on the market in light of the current market conditions. The US market’s may bounce back in the short term as the selling pressure could be a tad overdone, but the weight of negative economic sentiment may be too much of a wall for this bull market to climb in the intermediate term. A difficult market to call.

The currency markets may therefore offer the better trading opportunity over the next week. With a 70% chance of rate cut already priced into US markets and the ECB not expected to budge this side of Christmas, there is the possibility at least the Dollar could stabilise next week against the Euro between now and the next FOMC meeting at the end of the month. According to traders at BetOnMarkets.com, a no touch 2.5 cents above the current spot price yields 8% over 7 days.

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