Are stocks poised to drop?

One economist says markets could tumble as banks remove key support

By Kim Peterson Oct 26, 2009 12:19PM
Arrow © Photodisc/SuperstockStocks are headed for a major fall as central banks shift from buying securities to selling them, according to one economist.

Andrew Smithers, who spent 27 years running a major investment management business, thinks the S&P 500 Index is about 40% overvalued, according to Bloomberg.

Central banks across the world have taken extraordinary measures in the last year to pump more cash into credit markets, hoping to stave off an economic meltdown. But the cash spigot has to stop, and Smithers says the result could be disastrous.

“Central banks, they’ve got to stop some time and if that happens everything will come down," Smithers told the news service.

The Fed's asset purchases, including a substantial commercial paper shopping spree, have doubled the size of the Fed's balance sheet to $2.1 trillion, Bloomberg reports.

And it appears that the emergency actions have worked, propping up the S&P in its time of need. But already, the Fed purchases are slowing down.

Smithers says he stopped buying stocks in the 1990s and started again for a short period in the current crisis.

I think Smithers is a little too doom-and-gloom here. Yes, the central banks will ease up on asset purchases, and that will put more pressure on the world's economies. But banks have other tools at the ready to stabilize the economy, and will not allow a 40% drop in the markets.



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