Don’s Outlook 3/13/09
Last week’s peak of pessimism was also a trough in the market, and the long-awaited rally finally emerged on Tuesday. The S&P 500 Index set a closing low on Monday, but its intraday low was set on Friday when it hit the inauspicious 666. Since then, the index has rebounded 12.6 percent, and if U.S. markets follow the Asian and European markets, further gains are in store today.
The potential for a rally had been increasing, and after a false start on March 4, it needed only the right spark. Several positive news items seemed to be what supported the initial move and fueled its momentum. These included supportive comments about Citigroup and the low valuation of bank assets; remarks made by Fed Chairman Bernanke regarding the positive prospects for a 2009 economic recovery; and statements regarding a reinstatement of the uptick rule, which would slow investors’ ability to put downward pressure on falling share prices.
In the past two client emails, I alluded to these rallies and warned of riding the emotional market see-saw. Another note of caution is warranted. The market could run-up much further, but let’s consider the economic reality and popular emotion. Economic facts haven’t improved; the public mood has improved. Citigroup reported an operating profit for January and February, and Chairman Parsons said that Citi won’t need any more government money. This may be a turning point, but we’d be remiss not to consider the company’s total inability to foresee the crisis. Retail sales are “up” in the sense that they aren’t down as much, but this isn’t positive unless it becomes a positive number. Negative growth is bad no matter how small it is. And President Obama, who only a month ago was issuing dire warnings over the economy, now says it’s “not as bad as we think.” He may be reversing excessively pessimistic rhetoric, but the timing has the effect of spreading optimism.
Nevertheless, this rally looks like it will have legs and it is important to remain in the market. As government stimulus spending comes online, economic data will improve. A lot of people, from politicians to bankers, have an interest in lifting the mood of the public, and positive emotion can feed on itself to generate a much longer than expected rise in stocks. The moment of truth will come later this year when an economic recovery should reveal itself in the data points, but the market could be far ahead of that news.
