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Markets ignore economic gloom
By CNN's Robyn Curnow
LONDON, England (CNN) -- The past few months have proven to be troubling for investors -- a period characterised by uncertainties and contradictions. But there appears to be some light at the end of the equity tunnel. While weak economic data has been pointing repeatedly to a sluggish recovery on both sides of the Atlantic, stock markets have been displaying remarkable resilience. Recent rallies have produced some staggering statistics when compared to the deep falls during the darkest days of volatility in the autumn. The tech-heavy Nasdaq composite is at a five-month high, up more than 30 percent from its year low -- which was just six weeks ago. The Dow Jones industrial average has been rising steadily for seven straight weeks. In Europe, Frankfurt's electronically traded Xetra Dax has climbed to its highest level in nine weeks, rallying 27 percent since early October. Those huge gains in equity markets come despite a weak economic environment. "At the moment, we have very lacklustre economic data and growth prospects for the rest of this quarter, and I think going into 2003 it's not just the US, Euro land close to recession, situation in Japan remains dire," says Robert Parker at Credit Suisse Asset Management. And there are further signs of a faltering economic recovery. Two weeks ago, the U.S. Federal Reserve cut its key lending rate by a bigger-than-expected half a percentage point -- signalling a cautionary outlook on growth. Retailers are not predicting a bumper future and General Electric -- the world's biggest corporation -- has joined others in lowering its profit outlook. But still stocks are on an upward course, which begs the questions: Do investors know something about future economic growth that is not reflected in the data? "Markets are saying the risk of recession is much reduced. We will have positive growth next year," says Credit Suisse's Parker.
"The second factor, very important, we have an historic high rate of corporate restructuring -- the company profits are improving, will improve, not necessarily because demand is good but because they've been restructured to improve bottom lines." Still, how sure can investors be that markets will not start sliding again? "It would be very nice to think that we've hot the bottom," says Hilary Cook, director of investment strategy at Barclays Private Clients. "Quite a lot of encouraging noises are coming out. We see very high volumes... which is always a good sign. Not just volatility based on low volumes, but some sustained buying of equities." But any hopes of a sustained turnaround could be tempered by concern over a possible war with Iraq and growing worries about terrorism.
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