A second crash?

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Amid signs that tentative green shoots are beginning to wilt, investors are worrying that global stock markets could be headed for a sharp correction.

News that the world’s largest economy has pulled out of the recession was cheered by US traders, who pushed the Dow Jones Industrial Average up by 200 points, or 2.1 percent, to 9,962.58 on October 29, the day of the announcement.

“This is obviously welcome news and an affirmation that this recession is abating and the steps we’ve taken have made a difference,” president Barack Obama said after the release of data showing that the American economy grew by 3.5 percent in the third quarter this year.

But in a sign that investors remain doubtful over the strength of the recovery, the Dow Jones measure reversed those gains the next day, dropping 224 points, or 2.3 percent, after a sell-off in the financial sector.

In a tumultuous week, the other key US benchmark, the S&P 500, snapped a seven-month winning streak that had taken it 60 percent above its March low.

Positive news flow included earnings from Intel and JP Morgan Chase that were above expectations.

Some observers wrote off the souring mood as another bout of panic on Wall Street. To be sure, investors are anything but calm these days: the Chicago Board Options Exchange (CBOE) Volatility Index, or VIX, often referred to as the stock market’s fear gauge, topped 30 more than once during the week. VIX values above 30 are associated with a high degree of investor fear or uncertainty.

Others are more bearish.

Billionaire George Soros told university students in Budapest that the global economic recovery is “liable to run out of steam”, and that a “double dip” recession may follow in 2010 or 2011.

Sceptics say that stock prices have been propped up by the government’s stimulus spending and that they could come back down after it is unwound.

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