Surprises will continue, but some will be pleasant

In October the all important question was ‘Is the worst over for markets’? The key underlying message just a few short weeks later seems to be that, yes, it is. We are seeing some signs of investor optimism returning to the markets and the general economic outlook now seems a little less uncertain with a rebound in Asian markets being the major contributor to healthier market sentiment.

In the United States the tide of investor opinion does appear to be turning. Gross domestice product growth for the third quarter was nearly a third higher than expected at 3.3 per cent, which served to boost confidence in all global markets. Concerns about a capital markets credit crunch have been met most recently by yet another interest rate cut by the US Federal Reserve, the third in 7 weeks.
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Unfortunately the unwelcome corollary so far has been to give the US consumer reason to believe that lower share prices were just a bad dream. What is required now is for US investors to wake up to the fact that all is not well in the US economy.

We may not be heading for a recession, but we are heading for a significant slowdown. Instead, consumers continue to spend significantly more than they earn, which will make the shock of a downturn, either in stock prices or the real economy, that much more dangerous. Hopefully this last interest rate move will be seen to be in response to the real domestic problems facing the US.