Stock price rally could be a bubble
October 6, 2009
Stock and commodity markets may drop in coming months as the gradual pace of the economic recovery disappoints investors, according to New York University professor Nouriel Roubini, who predicted the financial crisis.
"Markets have gone up too much, too soon, too fast," Roubini said in Istanbul on Saturday.
"I see the risk of a correction, especially when the markets now realise that the recovery is not rapid and V-shaped, but more like U-shaped. That might be in the fourth quarter or the first quarter of next year."
Stocks have surged around the world in the past six months as evidence mounts that the global economy is emerging from its deepest recession since the 1930s. The Standard & Poor's 500 index has soared 51 percent from a 12-year low in March while Europe's Dow Jones Stoxx 600 is up 48 percent.
The euphoria contrasts with warnings from policymakers and investors. Group of Seven policymakers, who met in Istanbul at the weekend, said prospects for growth "remain fragile".
"The real economy is barely recovering while markets are going this way," Roubini said. If growth did not rebound rapidly, "eventually markets are going to correct to valuations that are justified. I see a growing gap between what markets are doing and the weaker real economic activities."
"In the short run we need monetary and fiscal stimulus to avoid another tipping point and to avoid deflation, but now this easy money has already started to create asset bubbles in equities, commodities, credit and emerging markets," Roubini said. "We may be planting the seeds of the next cycle of financial instability."
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