BIS Quarterly Review, June 2002

Waning confidence in strong recovery

The early months of 2002 saw a waning of the anticipation of a strong recovery that had built up in financial markets during the fourth quarter. Reflecting more circumspection, stock prices declined and US long-term interest rates edged lower. Unexpectedly strong macroeconomic growth data in late February and early March led to another burst of optimism, but this too ebbed as subsequent data failed to support buoyed expectations. Rising oil prices raised the spectre of inflation in Europe and led to a rise in euro long rates. In equity markets, investors’ hopes were dashed by a lack of evidence that corporate earnings were recovering in line with the economy as a whole. Share prices were depressed further by continued scepticism about corporate disclosure and accounting practices, by new reports indicating that stock analysts tended to be biased in their recommendations, and by a sudden aversion to companies seen as relying heavily on short-term debt.

The views expressed here do not necessarily reflect the views of the BIS member central banks.