Worldwide stock markets have today received a welcome, although unexpected boost with news that the US Federal Reserve have reduced US base rates by 0.5% to 5.75%. In a move which was designed to both inject liquidity into the money markets, and give the economy a much need boost, stock markets have rebounded sharply from recent lows. But is the worst over?
While a move such as that experienced today is not so unusual, in the past it has often precluded more bad news which the Fed were aware of, but which was maybe not yet in the public domain. Even though the markets have good reason for this show of short term relief, the situation is far from over and there will still be further fallout.
True, there will be more readily available liquidity in the markets which may see many firms over their bad times, but some companies have already suffered beyond reasonable repair. Many of Wall Street’s larger companies have become embroiled in the situation, and the fact that many are looking to be bailed out by larger banks around the world is a marked change from their front running attitude of the past.
The stock market is a volatile and unpredictable beast at the best of times, and it has a habit of biting back just when you think you have tamed the beast. Today’s substantial buying pressure has been greatly received, but those who think the situation is now over may soon be disappointed. The central banks around the world cannot support such man-made situations forever, and there will be some form of accountability at some stage – “pay back time”.
Once the current euphoria calms, many will still wake up to the fact that the US property market is still in big trouble, personal debt has never been higher, and much of the recent stock market rise was pinned on the back of takover and merger rumours. It is highly unlikely that we will see an immediate move back to wild takeover speculation, something which may bring many more share price valuations back into line with reality.
It is essential that investor tread cautiously in what is still a difficult period for world markets.