Stock Markets across the globe have staged a stellar rally over the last few days which makes us ponder whether the worst is behind us. The equity markets are a leading indicator in terms of the economy. If there is a recovery in sight say six months down equity market will detect it now. This is the main reason Equity markets gets into the over sold or over bought positions during every cycle. Though most analysts are cautious to read too much into this upsurge and still sticking to the stand that this is a bear market rally, we can afford to look at this more positively using the global cues. The rally is north of 25% in most cases and most markets have benefited from this rally.

Now let us step away from the stock markets and look at the economy. We have not had any unexpected bad news over the last 4-5 months. Home sales in the US are said to be picking up (let us ignore for the time being about the tax credit and other stimuli). Aggressive stimulus plans are being undertaken across most economies especially in the US. Tim Geithner is onto something though I am not too sure of his plan. There was a Satyam fiasco in India but did not spiral into a crisis with other Companies. Even Satyam appears to be getting slowly back on track at least from a survival perspective. So there are some positive indicators surfacing globally. This needs to get contagious and the sentiment needs to improve. Right now the sentiment is so negative that all signs of recovery may get eclipsed by the prevailing gloom and delay the recovery process. It is imperative the Governments step up the efforts with more stimuli to settle the nerves and get the spending slowly back on track. Just to elaborate the sentiment factor better let’s take the job equation. The layoffs may impact say 10% of the work force. But with this fear 80% of the workforce stops spending and which results in further loss of jobs and yield a spiraling effect. Hence lifting the sentiment at this point of time is of paramount importance. The timing needs to be near perfect here. You would not want to lift the sentiment unless backed by economy turnaround. At the same time complete economic turnaround cannot be expected without change in the sentiment. Hence the need to spot the correct turning point is critical for the current revival. Inaction or over action could take the recession over to Depression by next year. Fear of Depression is one of the major impediments today over lifting the sentiment. While I strongly believe that the economy will not get into a Depression, the probability however low cannot be ruled out. But that is a remote possibility and we should not let that happen.

There can be no turnaround without improvement in the credit markets. But we can definitely hope for the recovery in the next six months and restoration of securitization thereby good loans can get disbursed. The federal bank and the government has a role to play here.

Obviously the stock markets may continue to see down turns in the near future as well. There may also be another round of wash down with DOW getting back to 6100-6300 levels. But over the medium term we may be just about to or already seen the Stock Market bottoms. Most analysts may say recession always takes at least a couple of years to turn around. But we should remember that this time round the down turn happened so fast and took everyone by surprise that it did not take that long. This however does not mean life gets hunky-dory from now on. There is a painful and a laborious task ahead of rebuilding. It is like a natural calamity. There is a hurricane which destroys and after it subsides the rebuilding needs to start. It could take months or years to rebuild and is a slow process. The Corporate would do well to hold off the layoff plans till the end of next quarter to save the teams built with a lot of effort. In critical cases a temporary pay cut should do the job.

Governments will be staring at the uncontrollable deficits (particularly monetized) and the borrowings and getting these under control will take a few years. Retail investors can slowly start getting back to the equity markets and start accumulating stocks. Spending patterns will slowly start getting back on track.

Barring a remote possibility of getting into a depression, it is highly likely that the worst is actually behind us and can look forward to stability in the near future.