Long recovery ahead for stock markets

INVESTORS were warned yesterday to be wary of jumping back into stocks and shares by one of the country’s leading economists.

Friends First chief economist Jim Power said it could take 30 years for the stock markets around the world to regain the values they enjoyed before the hi-tech bubble burst in early 2001.

After the 1929 crash “markets did not recover the same real value until the 1960s”, he said.

In his view the bubble that burst in 2001 is not over and it more closely resembles the 1929 crash in its characteristics than either the 1973 correction or the one that hit the markets after the Second World War.

Prior to the crash of 1929, ordinary investors got sucked in two years before the markets fell dramatically, wiping out personal fortunes of ordinary investors in the process.

“They bought in at the high end of the market and were badly stung,” Mr Power added.

“This was replicated in Ireland in the case of the current bubble and the eircom disaster stands as a classic example of ordinary punters jumping in when markets were ar their peak.”

Eircom was a very good example of the “bubble syndrome” at work and it will be a long time before the ordinary punter gets back into this market, he said.

Suggestions that this is a good time to buy back into markets, irrespective of their source, have to be viewed with extreme caution.

In particular, Mr Power said the experience of 1929 in probably the best guide we have to how the markets will go over the next several years.

It could take five years for the markets to settle back into a definite growth path after the hammering they have taken since early 2001 when the hi-tech bubble finally burst.

Suggestions that this is a good time to buy have to be viewed with “extreme caution”, he said. “That’s what the lessons of the 1929 crash are telling us. I have been studying the period and the lessons are very clear,” Mr Power added. “We have seen several rallies in the past few months, only to see all of the gains wiped out as markets hit new lows.”

An article in the Financial Times at the weekend said it was time for investors to start buying British stocks, which it described as being at “bargain basement levels”.

“History doesn’t support that view,” Mr Power warned.

Outlining his disagreement with the FT.

Mr Power said just because markets had lost 50% of their value did not mean that all share prices had been trimmed of their excess fat.

Many stocks increased well beyond 50% of their real worth and that situation still stands.

“What we will see for some time to come is markets moving sideways.”

In other words they will gain in value and then loose it all again.

History suggests we are in for a very long recovery period, he said.