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Does the Market Rally Have Legs?

Posted by Larry Doyle on March 27, 2009 9:24 AM |

Barring a major selloff in the stock market in the next three days, March 2009 will go into the books as the largest positive month in the stock market since 1974. It all started 3 weeks ago today when the market, if not the world itself, felt like it was ready to end. The question before the court is “does this rally have legs?”

Having seen some stability and pleasant surprises in economic data over the last few weeks, will those trends continue? What prompted some of the stability in the first place?

In the face of consumer and corporate cutbacks in spending and expenditures, the government has been forced to provide relief to consumers. This relief came largely in the form of cost of living adjustments in Social Security and increased unemployment benefits. Were these the only props supporting a 20+% rally in the stock market? Doubtful. Don’t forget, no market ever goes anywhere in a straight line. The market was oversold and many investors as well as short term traders became exceedingly bearish. That excessive level of bearishness was the catalyst for this rally.

I am very mindful, though, of the bounce we experienced in the economy at this point last year when President Bush threw money at consumers in the form of a one time tax rebate. The billions in funds injected at that point made for a nice jolt in consumer spending and as a result in the market as well. Are we seeing some of the same phenomena now or is this a fundamental turn in the economy and thus the market?

We need to focus not only on consumer behavior but also corporate profit margins. There has been no indication so far of improvement on that front. In fact, in a report released yesterday corporate profits dropped the greatest amount since 1953. Are profits so low now that they can only go higher or will they remain stagnant?

The latest economic data released just this morning had consumer spending improving,but not at the rate from a month ago, while incomes declined overall. Additionally, a measure of inflation rose. For a full review, check out: Consumer Spending, Incomes, and Inflation.

While I like a rising market as much as anybody else, we are not out of the woods here by a long shot.

LD

  • fiscalliberal

    Larry – I agree. After a morning of hyping the market, Mark Faver came on and said ” its not over”. There are still to many things to be resolved.

    I know of a factory which in its peak had 250 employee’s, last year they had 120. This January they came down to 60 employee’s.

    Now orders have stopped, next week they are shutting down the plant. Employee’s are being assigned to maintencance, painting walls and cutting grass.

    Also, next week will be announcement of salary cuts and disconinuing the 401K contributions. One more week of non orders means letting more people go.

    This is from a major processor of copper in the United States. Generally copper industries are leading indicators of business.

    In todays column Krugman asked the question regarding new Geitner plan: how can we call this a normal market when the government has to get in and incentivize the market by loans and taking the bulk of the risk.

    I think your retisence is justified.

  • Larry Doyle

    The color you provide here about the copper is VERY interesting. Copper is a metal which is heavily used in industrial production. If orders were stabilizing or picking up, I have to believe this company would get a whiff of it.

    Obviously the government needs to provide support, but will conditions develop that lead companies to take some risks and look to grow their enterprises. There has been a workdown in inventories but I think that is primarily via significant discounting.

    The question we are trying to answer is whether we are in ANOTHER eye of the storm or if we can exhale having truly come out the other side.

    IMO, given that the economy did not truly fall off the cliff until last FALL, we’re in the eye.






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