Markets Panic – Where will the DOW be at the end of 2010?

The Greek and other European countries debt problem have been hanging around few months, but why did the market react suddenly in pessimistic way last week. There has been fear among the investors that the European crisis may spill over to entire European Union and as such spread to the world economy and pull it down. In this inter connected world there is all the chance to this happen. The main fear among the investors is how this crisis is going to be handled by the European Bank and the European Union. Whenever the main European countries like Germany were not supportive to help the debt ridden countries the markets strongly reacted in opposite manner. I think this created panic among the European stock markets and easily spread throughout the world.

Due to this market panic, US dollar and gold started to move upwards whereas all other currencies and resources started to go opposite direction. There is a solid reason why the gold went higher. It may be due to a feeling that gold is a safe haven. Why in this world the US dollar gained strength. We could again infer that investors think that in this uncertain condition it is better to put back their money in green back which is a standard currency where the risk associated to their money is less. This is only investors assumed feelings. It is highly debatable whether the risk associated to US dollars in this uncertainty is less or not.

DOW after peaking around 11,300 during April 2010 end have pulled back to 10,380 last Friday. In matter of few days the index has lost around 9%. The European markets in Germany, France and UK have lost more than 10% of their value. After gaining around 35% to 40% average in 2009, this pull down may be not be equal to the fall in 2008 during American mortgage crisis. We could take this as a correction of stock market.

But now the main question among investors is how the markets are going to react in remaining period of 2010. These types of economic shocks keep coming and going every now and then. It is the economic fundamentals which are going to decide the movement of markets in long term.

Markets lost more than half their value in 2008 American and British mortgage crisis because there was a conception among investors that the basic economic fundamentals of these countries were shattered. It was not just the conception but in reality there were some solid backings which put the economies in bad shape. Banks lost billions of US dollars and British pounds in providing loans without adequate security and their debts have to be finally taken by the ordinary tax paying citizens. Moreover the crisis in US and UK means the problem is huge as they produce and consume more than quarter of the world’s output. This can create ripple effect in each and every country which directly or indirectly deals with them.

Currently the crisis is centered in some small European economies like Greece, Portugal and Spain. To an extent UK is also in this debt crisis. But the bigger economies like Germany, Canada, China, Brazil and India have started to change their gears of growth. The growth in most of these bigger economies with the exception of US has started to perform well in 2010. US economy is still in cross roads due to their own past economic policies and political actions. The stock market was unable to go up further high until April 2010, which may be due to mixed conceptions among investors relating to the recovery of American economy.

After every economic crisis such as the Asian Currency crisis in 1999 or Russian crisis the markets after initially backing up strongly start to recover calmly and slowly back to its level and even move higher. Even after this European debt crisis, the markets should soon start to recover to its previous high level touched in April end. The level of going further higher may look little uncertain due to the complex situation of the world economy.

Since most of the larger economies have started to pick up, we can expect the market to move on average up to 20% to 25 % of their present value. As earlier discussed, it also much depends on how fast the US economy can create jobs and its economy can grow without any new financial problems coming out.

Since the US financial system is quite liberal and free in control, the chance for manipulating the system is high. There is a huge concern among investors that is there anything big still buried and may come out anytime further hampering the growth of the market. It is very important that there should be higher transparency and regulation in the financial system of these developed countries so that there is safety and stability among the markets.

As the economic fundamentals of the larger countries are strong now, the US economy also starts to pick up and the long term technical chart showing a positive growth, any investor may feel confident now that there is a higher probability of minimum 20% return in their investment in the US stock market in 2010. The DOW can be expected to cross 12000 in the end of this year.

As we know there will be high volatility as always seen from the markets. With more globalization of the countries and with such a complex global economic environment there is always chance for some crisis hitting the world frequently. It is more important now that how the world is ready to take and fix this crisis. If the framework and the systems are made more transparent and strong, the volatility of the markets could be significantly reduced.