Possible stock correction as US economy performs slowly

Possible stock correction as US economy performs slowly

09-30-2009 06:34

The US economy possibly operates slower than demonstrated in equity markets, which could result in a correction in stocks, according to Michael Spence, the economist famous for his job-market signaling model. The stabilization of economic expansion in the North American nation has been “overused” by investors, the Nobel Prize-winning economist commented in an interview last Monday. It is not likely that the world’s largest economy will face a “double-dip” deceleration even if this risk continues, according to Spence. The American economist is currently in Malaysia for the prestigious Forbes Global CEO Conference held in Kuala Lumpur, from September 28th to 30th.

Performs slowly

The senior fellow at the Hoover Institution and Philip H. Knight Professor Emeritus of Management in the Graduate School of Business at Stanford University stated: “Markets have created in a short period of time early signs of an economic recovery and normalization, which they overused. The US economy operates much more slowly than the current asset prices presume.” American equities showed the largest drop since July due to weak data regarding durable goods and housing, increasing concerns that an unprecedented rise during six months, surpassed outlooks for an economic improvement. The S&P 500 has climbed 57% in comparison to the weakest level in a year, posted in March.

Rose 20 times

Yesterday, the Standard & Poor’s 500 Index closed at 1,060.61, which is higher than the average outlook of 1,037, predicted by the 10 strategists at Wall Street’s largest securities companies. The profits in 2009 have raised the reading of the S&P 500 index to 20 times reported operating gains in comparison to last year, which is close to the peak in 2004.

Extremely low

For the first time in more than twelve months, US central bank policy makers signaled last week that the nation’s economy is improving at a fast pace. The Federal Reserve stated once again that they will remain the key interest rate “extremely low” for an “extensive period of time.” Spence commented furthermore that the chairman of the US central bank, Ben Shalom Bernanke, and other policy makers will increase interest rates at the moment they are “quite convinced” that markets are operating normally and credit reaches all parts of the economy. “In my opinion they don´t have a fixed concept on when they will take measures,” the economist commented. “It is likely that they do have a number of economic gauges that indicate the moment to start increasing interest rates.”