Economically everything has somewhat been synchronized in a global sense, synchronized boom, synchronized bust, synchronized government response (bank bailout's, stimulus plans etc) and now a synchronized tax shortfall, as goverments all go into deficit and begin their budgets; a global shortage of tax revenue is evident.
The markets should operate in a self corrective manner, when it becomes overbought it corrects, when it becomes oversold it also corrects on the up side. Stock market's all became very oversold after the Lehman Brother's collapse in September 2008. Since that collapse the global financial crisis, or global recession went into overdrive as known by the phrase ' falling off a cliff'. Can it keep falling? Sure no problem. Governments and their central banks have put a support under collapsing asset prices, this has come in the form of stimulus payments to consumers, to bank bail outs (underwriting bank deposits and guaranteeing bank debt, giving banks money), to buying it's own debt (governments bonds) and reducing interest rates. This of course has become hysteria based. The market looks at this in two ways, one a 'wisdom of crowds' (could this economic experiment in supporting assets prices work) or the 'madness of crowds' (is this all going to end in disaster, as government's eventually raise taxes, and the central banks pull liquidity out of the system to combat inflation) - the country economically collapses from debt and hyperinflation. To find an even perspective, especially in the stock markets is to look at the middle ground between those two observations. The simple, or Occam's razor answer to recent stock market rallies is they were and still are oversold indices.
The US economically is a mess, falling inventories, high unemployment and now a Federal Reserve Chairman is flooding the US with liquidity. So the consumer or tax payer is going to be hit with two things, increased taxes (now) and inflation (later) . If at some point the Federal Reserve believes the credit markets have completely unfrozen and low rates have been achieved. Money has too be removed from the markets. This will be done dramatically, as they are hopeless at timing in everything. But apart from all that, the Federal Reserve balance sheet is frightening, already admitting to a loss from the Bear Stearns rescue at $3 billion, who knows how much toxic waste is depreciating on their balance sheet. They can can print money, but when inflation (which remains on food at the present) comes back - it will be a horror story. Plus the shortfall of goverment revenue and the consumer will be hit from all sides, the US recession will be long and hard.
Still the big argument is how far can stocks recover? Hence the degrees of optimism coming back into the market. With Ben Bernanke creating inflows of cash (printing money) and boosting US stocks. Even when stock market giants like Microsoft posts losses. I would rather still listen to pessimists than optimists, especially when the US economy is so fragile. A recovery soon? Impossible, unless employment comes roaring back - then you get inflation and higher taxes to cover the shortfalls. It just doesn't add up to a recovery in 2009, or even 2010. You can blame the Federal Reserve for not only creating this mess in the first place, but now sustaining a flat lined economy, as mentioned the next big concern will be tax shortfalls. Which the world will pay for, thanks to reckless Government spending and bailouts by the central banks.
Deflation is still possible, even with massive stimulus measures. To what extend the swelling inventories of Asia can be sustained with out a massive price plunge is speculative. But the US has to start spending again, or at least the consumer. This is not going to happen anytime soon. Does it give the Fed room to move to keep printing? No, because prices will rise on the back of tax increases. I suspect globally this will happen all at the same time. So inflationary pressures may be already upon us.
As far as US stock gains, the tax payer gift to the banks was free money, rallies occurred yet were cautious. Coming quarters should bring some reality back into the stock market.
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