Stock markets are doing well, but why?

Posted on March 21, 2008
Filed Under Stock Markets |

Global markets and especially the US one seemed destined for doom just 5 days ago when Bear Stearns collapsed and JPMorgan with the help from the Federal Reserve picked up whatever scraps were left over at a bargain price. Global markets reacted to the news as expected losing much value as investors felt the crunch of the credit crisis in the US. Yet, the very next day, after a couple of interest rate cuts by the Fed, markets reversed direction erasing Monday’s losses and climbing higher than anyone would have guessed less than a week ago. But why?

This market behavior is highly irrational. The Fed interest cut was lower than expected; you would think that investors would have shown caution and yet they did not. In the US, government reported this week a bigger-than-expected jump in applications for jobless benefits last week. The U.S. Labour Department said first-time jobless claims rose by 22,000 to 378,000. Yes, this means more people are unemployed than before, i.e., more people have less money to spent. Moreover, the Federal Reserve Bank of Philadelphia said regional manufacturing activity dropped less than expected in February which is good news. However, manufacturing activity did drop so a rational investor would look at this results along with the higher jobless claims and lower than expected interest rate cuts and be cautionary. Instead, the markets are climbed higher and higher every day this past week.

Does this make sense to you? It definitely makes little sense to me. I get the feeling that the shit is going to hit the fan at some points because much what is keeping the markets going at the moment is nothing more than smoke and mirrors, deals that look good on paper and are based on paper assets and wishful thinking instead of any real economic indicators.

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