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The current market downturn looks set to persist for another few months
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Ongoing concerns over the economic health of the US and Eurozone aren't helping markets
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Short-term US dollar strength is possible, but longer-term weakness seems likely
The current market downturn sweeping the US and Europe is expected to persist for another one to three months and will not be as bad the 2008 financial crisis, according to Jack Malvey, chief global market strategist for BNY Mellon Asset Management.
"The worst case would be a mild, brief recession, but we are more likely to experience a low-growth recession over the next three to six months," he said. "While the worst of the current downdraft is probably behind us, it is difficult to determine the exact market bottom for these types of corrections."
Malvey characterised the current environment as an aftershock to the Great Recession, and noted that anxiety about a second economic dip after a primary recession has long been common. Typically, such concerns and negative market reaction about a possible secondary recession tend to dissipate within three months as a result of negative news exhaustion, markets finding an equilibrium state, and the emergence of attractive equity and credit debt prices after their decline to discounted valuations, he said. Malvey also noted that risky assets tend to rally before the end of recessions.
Growing pains...
The current market volatility has been sparked by a combination of catalysts, including anxiety about a potential US default arising from the spirited Washington debate over raising the US debt ceiling, the ensuing downgrade of the US by S&P from AAA to AA+, the threat of European contagion, and growing evidence of global economic growth deceleration. Taking a long view, these developments mark the first step in a major political and economic course adjustment for the US and Europe, according to Malvey. The anaemic post-recession recovery and the pronounced market volatility indicate that both the US and parts of Europe are on an unsustainable path due to a reduction in potential economic growth, ageing demographics, and rising entitlements, he said.
"This will be a long journey," he said. "Additional difficult decisions will be required in the coming years along the road to fiscal rectitude. Adding to the difficulties in the US is the concern about whether the new congressional super committee can agree to further deficit cuts in December 2011 without the enactment of draconian automatic triggers." Malvey also said that many market observers are questioning the advisability of federal government spending cuts in a high-unemployment, near recession environment.
Regarding the sovereign issues in Europe, Malvey said, "It remains to be seen if the European Union, International Monetary Fund and the European Central Bank can shore up the capital markets and prevent the issues in the weaker European economies from spreading."
Concluding in looking at the current low-interest environment, Malvey noted that dividend-paying equities could become increasingly attractive. He added that the unresolved European debt issues could drive the US dollar higher against the euro in the short run, although he expects the dollar to continue to decline against most other currencies over the medium term.
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