The markets and exchange traded funds (ETFs) have been on a roller coaster for the last several weeks, and many feel that there’s still more turbulence ahead.
“In the last two to three weeks, the credit crunch has intensified, and it’s not really surprising if you look at what happened in September,” Neil Michaels, head of quantitative strategies at SPA, told us.
It’s easy to get excited about a blockbuster day like Monday, in which the Dow Jones Industrial Average rocketed to its largest one-day point gain in history. But it’s going to take a lot more than that before anyone can truly rest easy that the markets are firmly on the right foot.
As evidence of the rocky road we’re traveling now, the Dow today was especially erratic, moving up more than 400 points at the opening, then declining sharply, before finally ending the day down less than 80 points.
“Going forward, I think we’ve seen a short-term rally, but it looks like it’s petering out already and the damage has already been done,” Michaels says. “We’ll see a deterioration in company earnings. We’ve seen it in financials, and we’ll see it in other sectors.”
Short-term leaps in the Dow and other major indexes are the least of the indicators that we’re truly out of the woods. Michaels says there are many other signs to look for that the economy is on firm footing.
“I think credit needs to start flowing through the system. We need to see a stabilization in company earnings, we need to see credit spreads tighten. They’re very wide right now. We need to see banks lending to each other.”
That isn’t to say that the capital injections won’t do anything, but they could take some time to work. We’ll continue to see volatility until that happens, Michaels points out. But until then, the stresses weighing down on the economy need to be significantly reduced.
“I think we’re a good six months away,” he says.
Irwin Kellner for MarketWatch points out that typically after everyone throws in the towel, selling reaches a climax and sends the stocks to a bottom for that cycle. Stock prices were driven to such low levels, it drew out the bargain hunters.
The stock market is just a sideshow to the frozen credit markets, which are truly the crux of the problem. Thawing them out will involve restoring confidence in the entire banking system, both in itself and among others.