Which way for shares in 2001?

Traders are pesimistic as they enter 2001.....

Stock prices across the globe are expected to fall when trading resumes after Christmas as reports of disappointing holiday sales in the US begin to trickle in and as the talk of a recession in the world's biggest economy gains momentum.

.....but optimists say the markets will rise this year

"We are one shock away from a recession," said Richard Berner, chief US economist at Morgan Stanley Dean Witter, adding that although he is loath to forecast that a recession will happen, it has become a real risk.

The sudden slowdown in the US economy has come as a shock to many observers.

"The deceleration in economic activity is the largest we've seen since 1981-82," Berner said, referring to the recession at the beginning of the 1980s.

Many financial institutions have recently said that the risk of a recession has crept up to between 25% and 40%.

Changed sentiment

It is a remarkable change from a year ago when financial professionals put the odds of a recession at between 5% and 10%.

All this talk about recession or near recession is way overdone

Ken Goldstein
Conference Board

At the time, the dot.com boom and the exuberance of the stock market seemed to be on an endless path heading north.

Since then, the dot.com bubble has burst and most stock indexes said farewell to 2000 at levels far below their entry in January a year earlier.

Optimistic predictions

Some analysts dismiss the pessimists and predict that 2001 will bring a lot of good news for investors.

The investment bank Schroder Salomon Smith Barney predicts that technology shares will recover, and foresee a sharp rise in several stock markets.

The US market should rise 12% and the UK market should rise 20% in 2001, the bank predicts.

US economy

The US economy is leading the developments; when the US sneezes the rest of the world catches a cold, as the saying goes.

The US economy cooled to 2.2% in the third quarter of 2000, from 5.6% during the second quarter, after having expanded at about 4% for years.

Figures for the fourth quarter have not yet been released.

Irresponsible talk of recession

But a slowdown is not the same as a contraction, some economists pointed out.

"All this talk about recession or near recession is way overdone," said Ken Goldstein, economist at the Conference Board research group.

"In fact, it's bordering on irresponsibility," he said.

Economists say a recession occurs when an economy contracts during two quarters of a year in succession.

Most recessions are caused by a shock, or a combination of negative events that knock the confidence of consumers, businesses or the financial markets.