What's happening in this "recovery" from 2008 recession is something very different than any economic recovery earlier. Generally Market enter into recession after stock market crash, followed by job cuts, which triggers even more reduction in consumption. Banks start looking shaky. This generally goes on and then for few years overall economic activity shrinks. Then suddenly some "new / upcoming sector led by innovation" start capturing attention. It attracts investors, it’s then followed by job creation in that sector, banks start looking better. This creates "Confidence back in Stock Market", and then Rally begins. So typically stock market Rally is the last thing to happen after recession. This time however the first thing that happened as a recovery was Stock Market Rally. Job market is still down in US, Europe, however stock market is up. We have to understand few main reasons behind it.
As a response to credit crisis, in 2008, US Government took below actions.
1) Unprecedented amount of money was pumped into system for "0%" Interest rate. (Stimulus)
2) In US, Federal Reserve was allowed to give "capital" to banks. (This one is very tricky I will explain it in next article).
3) Investment banks became normal banks by which they are allowed to borrow at "0%" Interest. (This is another trick)
4) Due to shaky global situations despite monetary base expansion from around 800 Bn to 2.1 Trillion USD actually gained as currency.
Now all this has exactly caused this rally. I.e. from ~8000 – 18000 on BSE and 6000 - ~ 11200 on Dow.
However in recent weeks we had strong volatility in markets.
As I had mentioned in article posted Apr, 27 2010, volatility began in markets, however I believe this volatility is temporary in context with stock markets and clear Rally is just round the corner.
Soon we will have “all is well” news from media and markets will rally again. Now that soon may be in range of few days or even few weeks to from now I believe.
This does not mean that we need to be very optimistic about economic growth. However when I see above 4 points and understand the fact that there is a “Direct pipeline of Strong Dollar” from Federal Reserve to Morgan, Goldman, DSP and they have direct pipeline in all stock markets in world, I don’t see any reason for markets to correct a lot.
Also if say situation worsens in Oct-Nov this year, US will not hesitate to give another stimulus package as they said, “Last one was indeed profitable”. E.g in case of Citi they bought shares for 1USD and now plan to sell at around 4.00 USD.
concluding rules of game are still same there is no change in policy that “Bull must run by hook or crook”.