Stephen S. Roach, chief economist and director-global economics at Morgan Stanley & Co., is afraid of what he calls the "schizophrenic character of economic recovery."
For the third time in about the past year, the Standard & Poor's 500 has rallied to produce 20%-plus gains, leading to hope each time that an economic revival was at hand. He worries that the current rally is a "bear trap."
In each of the two previous rallies, hopes for recovery were dashed by anxiety about the economy, sending the stock market back down, wrote Mr. Roach in a weekly international briefing for clients.
As of Nov. 27, he pointed out, the S&P 500 was up more than 21% from its low of Oct. 9, when it closed at 776.46. That rally is "little different from its two preceding rebounds - recoveries of 21% off both the Sept. 21, 2001, low and the July 24, 2002, low," he explained.
"Is the current rally in the stock market any different, or is it is just another " he wrote. "My fear is the latter - yet another rally that falls victim to lingering weakness in the U.S. economy."
On Dec. 5, the S&P 500 closed at 906.55, up 16.8%, or 130.09 points, from Oct. 9, but down 32.32 points from Nov. 27, when it closed at 937.87. The economy, he believes, "remains stuck in a subpar growth channel, with real (gross domestic product) growth averaging around 2%." The economy exceeds this bogey in some quarters, and other quarters it falls short, he wrote. "This schizophrenic character of economic recovery is the essence of the post-bubble business cycle."
It "will be exceedingly difficult for the U.S. economy to mount a self-sustaining, vigorous cyclical recovery."
