Market lift: Here to last or a sucker's rally? 

Source: Reuters

Is the improvement we are seeing on world stock markets sustainable and justified or are we seeing a so called 'sucker's rally'?

This is the question that is exercising the best of economic minds around the world right now.

The optimists and those talking up the so called 'green shoots' in the economy, (Fed Chairman Ben Bernanke included), have had it pretty good for about six weeks now.

Markets have soared over 20%, on the back of better than expected profits from some of the big US banks, and stabilisation in the US housing market.

The US government's bank stress tests have also given confidence to the market, while stimulus packages around the worl, especially China's, has helped underpin some level of demand in the world economy.

However the pessimists staged a fight back this week, with US retail sales providing the ammunition.

Markets had been hoping for another small increase in retail sales in April after a good month in March.

But they didn't get it. Sales slid and markets around the world instantly dived about 2%.

This is significant as US consumer spending makes up a big part of the US economy.

It was a reality check and a reminder that with unemployment at 8.9% in the US, American consumer confidence is going to remain a drag.

Rise and rise not necessarily good

Some brokers I've talked to say a bit of a pull-back or calm period on the markets may not necessarily be a bad thing going forward.

Big spikes make them nervous and they want more evidence that the recent rise in stocks is definitely built on economic fundamentals...

This is probably because, as plenty of economists are pointing out, there were strong bear market rallies after the initial stock market crash of 1929 and they ultimately proved to be false.

Mark Brighouse fund manager at Brook Asset Management says in these times investors must climb the 'wall of worry' back to recovery.

Although, he says investors with a more medium term outlook probably don't need to stress quite as much about the strength or otherwise of the green shoots we are seeing right now.

Say, that a light there at the end of the tunnel?

There is at least some level of agreement amongst commentators at the moment about the economic situation and that is that the world has at least averted a full scale depression or economic melt down.

Few now think we are heading for total disaster and there seems to be feeling that the banking system now does have the worst behind it.

However major challenges to a speedy or V shaped recovery in the real economy remain, in particular the ability of consumers to de-leverage or pay off their debts.
 
Brighouse says it's going to take a long time for consumers to go through this process, because unlike corporates they can't go to equity markets to raise fresh capital.

This is only likely to further dampen consumer confidence spending in coming months.

Add in the threat of rising unemployment and the road ahead looks far from easy.

Brighouse is picking more of a W shaped looking recovery.

He thinks there will for example be sporadic spikes in consumer demand as people finally commit to buying that new appliance etc. they had put off buying at the start of the recession.

Export demand will bounce around too as firms rebuild inventories.

But whatever the shape of the recovery, it seems that despite the positive signs of last months, many of I think are genuine, it is not going to be a fast or painless return to growth.

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