Don’s Outllok 3/6/09
We had another difficult week in the markets as investors continue to be surprised by bad news. None of the news out this week was altogether new, but for some, hearing that GM is headed for bankruptcy is still a shock. Bellwether stock GE has also inflicted pain on the confidence of investors, as many awaken to realize the once great industrial giant transformed itself into a financial firm over the past two decades. GE stock has rebounded since falling sharply on Wednesday.
The S&P 500 Index fell 9.3 percent last week and has lost 24.4 percent year to date, as of yesterday’s close. Shares are down 20 percent since President Obama took office, leading Bloomberg to dub it the Obama bear. His budget played a role in the recent slide, due to the huge sell-off it triggered in the previously defensive healthcare sector, and the continuation of ad hoc bailouts does nothing to inspire confidence. Financials and industrials continue to bear the brunt of this year’s selling.
Nonetheless, the reality is that the old economic order is gone. Americans did not save enough for nearly two decades and nothing can change that. All the predictions about how terrible the economy will be if everyone starts saving 10 percent of their income miss the point that Americans must start saving or the outcome will be far worse. If politicians continue to try to force a recovery in housing or financials, they will be disappointed, but they will also prolong and deepen the eventual adjustment process. Unfortunately, this market is unlikely to bottom until additional optimism is wrung out of investors.
As bad as the news can get, there are still a lot of cautiously optimistic investors out there. They will provide support for rallies that can build quickly. Short-covering sparks rapid advances in just one or two days, and bargain hunting can give the move legs. Stimulus spending will affect GDP figures positively, and many people believe in a second half or 2010 recovery; soon they will have their proof as government debt spending lifts economic indicators. Markets don’t move in straight lines, and in order to move significantly lower, investors would have to throw in the towel and give up on a 2010 recovery. We’re still a long-way from that happening.
Just because things look bleak, however, doesn’t mean there won’t be opportunities. Several market gurus were predicting a rally last week, and after this week’s dismal performance, a sharp rally appears even more likely.
