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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






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