The Recent Market Rebound? Just a Sucker's Rally

Wall Street predictions are wrong about half the time, so take them all with a grain of salt. That said, the current views of Morgan Stanley strategist David Darst have more logic going for them than most. And Darst is about as bearish as brokerage strategists get.

Contrary to the predictions of those who view the market's recent rally as a sign that it's off to the races again, Darst says we are following a classic bear-market pattern. In this FT interview, Darst explains that bear markets tend to unfold in three stages:

* Big sell-off (which we saw in the crescendo leading to Bear Stearns collapse)
* Big sucker's rally (the month of April, with GM up 22%, Citi up 18%, Japan up 11%, and so on)
* A "Long, inexorable, relentless, grinding lower that takes 6 months, 9 months, a year."

We've gone through phases 1 and 2, and Darst is "worried" we're entering the third phase. So is bonified guru Jeremy Grantham, who ridicules the idea of a "V-Shaped" recovery.

The biggest difference between bullish perception and actual reality? Profit expectations. Rosy-eyed analysts are still looking for 11% profit growth this year, says Darst, while Morgan Stanley thinks earnings growth will only be 3%. If this profits cycle follows the usual pattern, even Morgan Stanley's prediction will probably prove optimistic.

See Also:
V-Shaped Recovery? You've Got to Be Kidding Me
Sorry, the Stock Market is Still Screwed

Comments

[joebaggadonuts]

I think that you will be proven correct very soon. I will be much more certain if the NASDAQ falls 50 points or so over the next few days. Then there's always helicopter Ben who can devalue currency yet again, so there's really no certainty AFAIK.

[WIpatriot]

"...take them all with a grain of salt."

Why do you have to take away my comic relief??

[tulsey]

Maybe we can all get jobs building jets in China.

[WIpatriot]

How's your Mandarin blueprint reading?

[zizyphus]

I would have some faith in the market if I thought it was influenced more by individual investors. I know that those huge funds can move the market by the way they buy and sell, and short stocks. The little guy doesn't have much of a chance. As for the economic figures the government releases, does anyone really believe them?

[WIpatriot]

I do.

NOT!

[Robert59]

This is bigger than a bear versus bull market. This is about power. The party in power is Republican; its supporters are Wall Street and big business. The goal is to keep as many Republicans in office come November as possible. The party wants to hold onto the presidency, but if that's not possible they'll settle for keeping the balance in Congress the way it is. The party already owns the Supreme Court. And the party has the allegiance of the general officers (the ones who count). And let's not forget the Fed (I'd bet the remainder of my life's retirement checks Bernanke is a Republican).

Their strategy to avoid a fiasco in November is to delay the recession. All indicators must be manipulated be to show some growth, however anemic. No two quarters of negative growth. And keeping Wall Street artificially propped up is a grand part of the equation. Who owns stocks? Republicans, mainly.

Who would leave the party and vote for an alternative should Wall Street reflect economic reality? The Republican base, the ones who give money that keeps the party in power.

And they don't care how they do it. Pump money we don't have into the economy is the strategy they've chosen. And the taxpayers are too stupid to realize Bush, Congress, and the Fed are making things worse not better.

Magicians creating an illusion. And Democrats like Pelosi are going along because if they didn't their party would be blamed for Bush's mess.

[joebaggadonuts]

A lot of people here have drawn the same or similar conclusions. If Limbaugh is supporting Obama, perhaps even the republican base is noticing the truth. I think it was telling that George was so flat-footed when he noticed that gasoline could be 4 bucks a gallon. This was something even he could understand would cost him his base if something was not done quickly. His answer; blame the democrats for not allowing drilling in ANWR. Clearly, when the people feel pain, the answer is to blame the other side before they can figure out what is going on. That of course is plan B. Plan A is to keep wall street numbers up until November and keep people focused on baby killer abortion supporters, the invasion of the brown people, and celebrity T&A.

Isn't it ironic that they installed the guy we now call Hellicopter Ben because of his strict anti-inflationary credentials? Life is rich with irony.

[Lib2daBone]

Broave Robert59! You nailed it . Well said. Our Govt is LYING THEIR ASS OFF. Inflation numbers, unemployment, GDP.. all lies. Even the most Pig-headed, hypocrital, Rush Limbaugh listening, Bible-beating , evangelical-loving Sycophant, CAN NOT believe that inflaltion is 2% ? ROFLMAO. Inflation minus Food and fuel 2%.. hahah hohho haahah . We're all Friggin' doomed! I guess no one in Washington eats food or drives a car. I can easily understand why the Sheeple believe these numbers... inflation is so hard to miss. Call me when the Depression is over. I'll be sitting in front of my TV stuffing my face with "CHEETOS" and watching Fox News.

[Frangelica]

The war profiteering by contractors, monopoly oil, refining, pharmaceutical and hmo profits, should be mitigated. Default further payment. Suspend subsidies. Indict the Administration. Exact penalties for market manipulation ala Enron. Exact royalties on pharmaceuticals developed under any form of subsidy/grant/incentive. War profiteering must be recouped and penalized. Profiteering from outsourcing and offshore banking must be tariffed and regulated. All public domain based profiteering should be distributed to the publlic.
Hundreds of billions could then be allocated to green tech, schools, medical coverage, innovation, infrastructure and prosperity in the US and America.

[Robert59]

Amen Frangelica.

[freshnotbitter]

I think the question will be how much the BRIC factor plays in the economy but Halibruton's war will have to be paid off and it didn't come cheap.

The amount that could be pumped in to the economy from a)rationalized health care b) peace and
c) energy conservation/energy alternatives is so huge that we'd be off to the races in no time.

The problem is the lack of political will on the part of the public. They prefer to wallow in their ignorance and that can be expensive.

[bluesnot]

The political will of the public? Please explain. How does the public affect political will when it comes to misappropriated tax dollars and legislation written by and for the benefit of ultra-wealthy corporate concerns.

Last time I checked, our representatives weren't listening to the public. They are comfortable with a system where they can buy their office and do as they please.