The last few months have been extraordinary to watch. The US economy remains in the toilet and the disasters in Dubai and Greece tell us there is a sick global economy but US stocks have risen 70% over the last nine months. Which suggests there is the stock market, and the real world. Still, with stocks hitting a 15 month high with jobless claims falling and orders for goods on the up, it's worth asking how long this rally will last. Is it a sign of things to come, or is this just a sucker's rally?
Wall Street banks say stocks will continue to rise, albeit modestly, next year. Someone at Dow Jones should take a cold shower. It's predicting that the market could even rise 20% next year.
You would have to have rocks in your head if you believed that completely with the Federal Reserve forecasting in November that the US would grow at a slower rate. Furthermore, there is so much debt in the system that there is every chance the worst is yet to come. Dubai and Greece might be harbingers of what's ahead. We are looking at a sucker's rally.
Commentator Eric Roseman says the party will continue until about April. And then it will get ugly. "At that time, a severe correction will drown the market as stocks tank 15% or more quickly,'' Roseman says. "Some sort of Black Swan will unleash a new wave of uncertainty and quash the ongoing bullishness. Stocks will finish 2010 with a loss – ranging between -5% to -10%."
Mohamed El-Erian, chief executive of giant bond manager Pimco warns that the rally has been created by government spending and near zero interest rates. It can't last. He says stocks will drop 10% in a space of about three weeks and unemployment will still be at a high of 8%.
If you don't want to invest, it might be a good idea to hold on to your money. Prices are going to come down. It's not a question of if they will fall, but how far.
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