Insight

Stock Market Crash Appears Possible

Reuters reported today that the Dresdner Kleinwort Wasserstein bank has warned its clients that revised US productivity figures due to be released Tuesday could result in a market crash.

It is expected that the revised productivity figures will indicate that US productivity has not only not been rising as expected, but that the whole productivty miracle of the 1990s was a result of measurement errors.

This means that the internet revolution, among other things, has increased the profitability of companies less than previously thought, and that future productivity increases will be less than expected.

Since the beginning of the year, US stock markets have been unable to trade out of a relatively narrow price range. Performance of this type is sometimes followed by dramatic moves in one direction or another. Given the present lackluster state of the economy, it would appear that bad news of this kind could indeed spark a sharp selloff.

The decline in the NASDAQ over the past six months has been relatively greater than the decline of New York Stock Exchange prices between August and December of 1929. The fact that such a substantial decline has already taken place might make a genuine crash less likely.

Nevertheless, it is unusual for a prestigious international institution like DkW to issue such a warning. DkW Global Strategist Albert Edwards wrote "Investing in the US miracle will in retrospect be seen as a sick joke. The markets will be forced to confront this harsh reality on August 7...The risks of an equity crash are high."

US corporate earnings estimates across the board are based on a 2.5% annual increase in productivity. The new estimate will be 1.5%, and will require a general reduction in earnings estimates. Inevitably, equity markets will have to adjust to this new reality. Whether Mr. Edwards is right in predicting that this will mean a crash, remains to be seen.

NOTE: This Insight, previously published on our old site, will have any links removed.


Subscribe to Unknowncountry sign up now