Credit Crisis Causes Bull Market in Stocks

“Investors debated overnight whether the global credit crisis had peaked, but with Deutsche Bank and Merrill Lynch financial results looming large Wall Street remained jittery,” explains Reuters this morning. Stocks everywhere have rallied since late August. The ASX 200 closed at a record high of 6,659 while stocks in Asia, Europe, and America all rose on anticipation that more rate cuts from the Fed are on the way.

Yesterday the Dow paused and lost 40 points, as if rethinking the logic of the rise. It would be unusual for a rampaging bull market to begin on the foundations of an epic collapse in the credit markets. How can a phoenix rise from the ashes before it’s been consumed in fire? But that’s really the question today isn’t it? Not about the phoenix, but about the bear.  Can you have a bear market in credit and still have a bull market in stocks?

The bullish scenario is that the worst is over in subprime. Although it was bad, it wasn’t end of the world. “We can’t tell if new sources of asset panic will arise given the surprises so far. Nearly driving over a cliff and veering away provides a completely different outcome than going over it,” said Steven Wieting of Citigroup. So it was near miss, according to some.

A simpler explanation is that the money no longer going into short-term bonds is going into stocks. In other words, the bear market in credit is fully consistent with the bull market in stocks, at least in terms of money flow. Investors have given up on high-risk, high yield debt and moved on to high-risk, no yield stocks. The weight of money into the market has created a self-fulfilling bull market.

So stocks have become a great lifeboat. But they’ve been taking on investors awfully fast. How much upside is left? You’d expect valuations to become an issue at some point. But that point is probably after 7,000 on the ASX 200. With not much to choose from in other assets, stocks are the only game in the global village right now…unless you are sifting through the rubble of the CDO market. 

Dan Denning
Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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4 Comments on "Credit Crisis Causes Bull Market in Stocks"

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Hans Blix

“…unless you are sifting through the rubble of the CDO market.”

That I am. There could still be a gem amounst the rocks.

Coffee Addict
Dan I would like to say I have no understanding about what is going on but I am paid to care. Hundreds of thousands of “Forrest Gump” style investors, spectators and neither know nor care. I wish them well but there is no way (I know of) to decouple the credit and equity markets. All that separates the two markets is maybe a 12 month time lag. In the movie, Forrest made a fortune out of a natural disaster then invested all his money in that little fruit company called Apple Inc, a company that easily outpaced the 1987 correction.… Read more »
Coffee Addict

Hans is absolutely correct. And the big banks are gobbling some of the opportunities up as you read this.

In addition the securitised credit market will regain “some” of its old momentum as soon as issuing insitutions get around to


Lately, it’s like being in the eye of a hurricane.

Things seem OK – but they aren’t.

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