Nine months ago, when there was a lot of excitement about the Dow touching 13000 points for the first time since the crisis began, I posted “What´s so special about 13000”? I ended the post writing:
So 13000 is just the “top” of a log running range. And that´s why investors feel the proverbial “chill in the spine”. As I mentioned a couple of days ago with reference to the S&P, “this stock market rally is not for real”. It´s just riding a “foamy wave of sentiment”. That´s been mostly true for the past 13 years. The “novelty” is that now the market´s “conduit” has been, believe it or not, inflation expectations. A hell of a “way to go”!
In the comment section of that post I answered a comment by Mike Sax in which I proposed a wager:
And I´m willing to wager that if monetary policy remains on the “side lines” in 6 months time the DOW will not be higher than 13000!
I “lost” that wager by about 100 points. But another three months on things have worsened again. The Chart illustrates the Dow on a weekly frequency since January 2011 with the dotted bar denoting the day the post was written.
Now I´m more cautious about a new “wager” because Nouriel “Doomsday” Roubini has said things are very likely to get worse!
As consumers, firms, and investors become more cautious and risk-averse, the equity-market rally of the second half of 2012 has crested. And, given the seriousness of the downside risks to growth in advanced and emerging economies alike, the correction could be a bellwether of worse to come for the global economy and financial markets in 2013.