Friday, July 24, 2009

The conundrum behind the stocks rally

It's been heartening to see the rally in the stock market over the last week or so. Even the BBC have been giving it a bit of fanfare, as they did on BBC1's Breakfast this morning. Hurrah!

If you go to the heart of the recovery in the States, however, there is a bit of a conundrum at the centre of it.

As CNN's The Buzz explains, by enlarge, the shares are rising in response to good profit statements from companies such as AT&T and 3M. However, those profits are being obtained by companies reducing costs rather than increasing revenues. Indeed, sales are dramatically down, generally (with some notable exceptions such as Apple).

And there's the rub. You won't get a full recovery from recession until sales start rising. Companies are pushing share prices up by making profits through reducing costs. The main way they have reduced costs is by laying off staff. People are unlikely to go out and spend oodles of money if they have been laid off, or if their friends or neighbours have been laid off, frightening them into penny-pinching.

So, the rally is a bit deceptive and unlikely to be followed by a proper recovery until sales pick up and they won't pick get the picture.

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