Friday, May 21, 2010

Stock prices are well ahead of economic reality

SHOOT: I've been emphasising this over the past few weeks haven't I? We're not out of the world's economic woods yet, not by a long shot, and plenty more carnage to come. China has started crashing. Europe is. And what of the US? When the US goes it's game over.

The Labor Department's latest employment report added to worries about the global economy.

The department said new claims for unemployment benefits rose by 25,000 to 471,000, their largest amount in three months. That came as an unpleasant surprise to investors who were expecting a slight drop to 440,000.
clipped from
Specialist Dwayne V. Branker, right, with Barclays Capital, works from the floor of the New York Stock Exchange, Thursday, May 20, 2010, in New York.

The Dow Jones industrial average fell 376 points, its biggest one-day point drop since February 2009, and all the major indexes were down well over than 3 percent. Meanwhile, interest rates fell sharply in the Treasury market as investors once again sought the safety of U.S. government debt.

With Thursday's drop, the Standard & Poor's 500 index, considered the best indicator of the stock market's performance, is down almost 12 percent from its 2010 high close of 1,217.28, reached April 23. That means the market is officially in what's called a correction, a drop of 10 percent or more from a recent high. This is the first correction since stock indexes hit 12-year lows in March last year. The fact it has occurred in just 19 trading days shows how anxious traders are right now.

"The economic recovery story has started to look like a mirage and the new reality is a return to credit crunch conditions" like those seen during the financial crisis, said Tom Samuels
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