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PREDICTIONS OF A RECOVERY ARE FAR FROM CERTAIN

<strong>DAVID MORRISON</strong><br /><strong>CFD MARKET STRATEGIST, GFT</strong><br /><br />IN these pages yesterday, CNBC&rsquo;s Steve Sedgwick warned about unemployment ahead of this Thursday&rsquo;s Non-Farm Payroll number. He pointed out that many economists dismiss jobs data as an irrelevant, &ldquo;lagging&rdquo; indicator. But as he pointed out, when consumers account for 70 per cent of US GDP, then unemployment becomes a serious headwind to recovery. With high levels of indebtedness here and in the US, losing one&rsquo;s job can have disastrous consequences. Companies and banks have to write off debt, tax receipts fall and social security costs rise. You could argue that the full effects of job losses aren&rsquo;t felt for months.<br /><br />There is another piece of perceived wisdom that we should treat with caution. We often read or hear that stock markets forecast the state of the economy in six months&rsquo; time. Many economists are using this logic to predict that the recession will be over by the end of the year. But this is not always the case. Given the severity and uniqueness of the current financial crisis, I would be wary of betting on such a recovery. Anybody using the stock markets in October 2007 and May 2008 to predict the future would have been disappointed.<br /><br />It took years to build up the leverage and indebtedness which is now being unwound. The collapse of markets has gone a long way to reflect the trillions of dollars that have already been vaporised. But it isn&rsquo;t over yet. The world may have been saved, but no one is prepared to even look at the bill.<br /><br />Even though stock indices were oversold by March this year, I don&rsquo;t think the market is right in predicting a sharp recovery. The next big hurdle for equities is the second quarter earnings season which begins in just over a week. The recent fall in momentum suggests traders are nervous.<br /><br /><br />