Basic economic risk management instruments, such as hedging, were simply not used, because the confidence was uncontrollably high and investors never believed that prices would go down or that credits would become more expensive.
The important issue is whether or not the economy is following a recession at this moment and, especially, if the stock market is currently bearish as much as it was bullish in the past years. The article "5 ways to know if the bull is over" concentrates on clarifying these aspects and on identifying the traces that a bear market would leave in the current market situation.
According to the article, the first signs that a bull market is over includes lower consumer spending, concerns about the subprime mortgage loans etc. This is currently the case in the present and the stock market is keen to capitalize on all of these. Indeed, the Dow Jones index has closed above 14,000 points in July 2007, only to take a dive afterwards and decrease with up to 9.8% in the subsequent months that followed. As we can see from the chart below, in just under a month, the Dow Jones value has gone down from over 14,000 to well under 13,000. This is not a singular case, with the S & P. index losing all the gains from the previous year.
More indications of a possible end to the market bull currently identified in the article include the increase in oil price (with prices going over $80 a barrel), a decrease in overall consumer...
The fact that the Federal Reserve has decreased the interest rate levels by as much as 0.5% (while everybody expected only a 0.25% reduction) shows that the concern for economic recession is, at this point, much higher than the concern for inflationary pressures, for example.
The current mortgage and real estate crisis is perhaps just a consequence of the growing recession trend over the economy in its entirety. While the macroeconomic measures to stimulate economic growth are already been implementing (best example is the Federal Reserve interest rate increase), it remains to be seen whether this can also boost the investors' confidence.
Bibliography
1. LaMonica, Paul. 5 ways to know if the bull is over. CNN Money.com. On the Internet at http://money.cnn.com/galleries/2007/moneymag/0708/gallery.how_youll_know.moneymag/6.html.Last retrieved on September 30, 2007
2. Tully, Shawn. Risk returns with a vengeance. Fortune Magazine. August 2007. On the Internet at http://money.cnn.com/2007/08/17/markets/risk_returns.fortune/index.htm?postversion=2007082312.Last retrieved on September 30, 2007
