LITTLE ROCK — Scarred by the worst banking crisis since the Great Depression, bankers, investors and policymakers who gathered in Davos, Switzerland, last week gave a guarded welcome to signs of recovery in the world economy and the endurance of the euro region.
“Optimism, but with a sober tone,” was how Bank of America Corp. Chief Executive Officer Brian T. Moynihan characterized the mood pervading the World Economic Forum’s annual meeting, even as investors were lifting the Standard & Poor’s 500 Index above 1,500 for the first time since 2007.
The mood in Davos was “totally different” when stocks last reached that peak, said Harvard University economics professor Kenneth Rogoff, 59. This year, executives from Deutsche Bank AG and Goldman Sachs Group Inc. were quick to couple upbeat assessments with warnings that economies remain fragile and prone to policy error. Some bankers fretted that credit bubbles may be forming as central banks pump out cash.
“The crisis gave them a bit of an inoculation psychologically, because they can see what can go wrong,” Rogoff, a former International Monetary Fund chief economist, said after a Saturday private session with IMF Managing Director Christine Lagarde and Deutsche Bank Co-Chief Executive Officer Anshu Jain. “They’re not as euphoric as they’d usually be when the stock market went up as much as it has.”
Such humility was rare in Davos on the eve of the credit crisis that engulfed markets in 2008. The year before, John Thain, then-chief executive officer of NYSE Group Inc., said “the financial markets, the world economies are all actually in quite good shape.” Josef Ackermann, Deutsche Bank’s CEO at the time, said investment banks “have a very good future.”
Burnt by the subsequent collapse of Lehman Brothers Holdings Inc., more than $1 trillion in bank losses, the stigma of taxpayer-funded bailouts and a worldwide recession, leaders of the largest banks displayed little bravado in the Swiss resort this year, even as markets cheered improving economic growth in the U.S. and China and reflected an ebbing risk that a euro-member country might abandon the currency.
The MSCI World Index of stocks has climbed 5 percent this year and is up 13 percent from a year ago. During the week of the Davos conference, U.S. stocks capped the longest stretch of daily gains since 2004, as companies delivered better-than-estimated corporate earnings, claims for unemployment benefits fell to a five-year low and the index of American leading indicators rose the most in three months.
In China, economic growth accelerated for the first time in two years, the National Bureau of Statistics said in Beijing on Jan. 18. Government efforts to stoke demand drove a rebound in industrial output, retail sales and the housing market.
And in Europe, investors have become less anxious about the euro region’s most troubled members.
“We’ve chewed through a lot of the problems and I would say my investing self tells me that the worst is over,” said Goldman Sachs CEO Lloyd C. Blankfein, 58. Still, “this wouldn’t be the first time that I’ve suggested the worst was over only to find out that there was a bit of a relapse.”
The S&P 500 climbed 5.4 percent this year through Friday, after an equal increase for the same period in 2012 and a 2.3 percent advance in 2011. The benchmark ended last year with a 13 percent gain and was little changed for 2011.
“Everyone has experienced some positive Januarys that haven’t carried on through the rest of the year,” said Lael Brainard, the U.S. Treasury Department’s undersecretary for international affairs.
UBS AG Chairman Axel Weber said investors need to be prepared for a “bumpy” ride. “Whilst the underlying trend is better, there is still a lot of volatility in the market and it’s not going to be a straight-line recovery,” Weber said. “It’s going to be bumpy, and therefore investors need to be prepared for that push-back, for the mood in the market to turn.”
A recurring theme in corridor conversations at the conference was that markets were buoyed by monetary easing, which has pushed down interest rates and spurred investors to take more risk in search of returns. Market gains could prove fleeting once central bank policy reverses, attendees said.
“The world has been over reliant on central bankers; they are the new superheroes,” said Deutsche Bank’s Jain, 50. “Governments and business leaders need to pick up the slack” after central banks created an “artificial glut of plenty.”
Business, Pages 21 on 01/29/2013