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GM’s bankruptcy generated the most news this week, much of it lamenting the fall of a once great American corporation. In the markets, investors and traders greeted the demise with a relief rally that sent the S&P 500 Index up 2.58 percent on Monday. General Motors was a company in decline for decades, and the political panic was far out of proportion to the economic reality. GM problems were known for years, but they intensified in the past decade. It may be the financial crisis that finished the company off, but even without the recession, bankruptcy was always a possibility.
The U.S. government’s bailout of the automakers, a policy repeated by other governments around the world, will turn the automobile industry into the airline industry. Companies will move in and out of bankruptcy because only liquidation can end the overcapacity that makes the industry a destroyer of capital. The current solution will allow Chrysler and GM to emerge more competitive than their rivals, who may in turn enter bankruptcy in future years and then emerge stronger, and the cycle could repeat.
By Wednesday, GM was long forgotten as markets turned to economic data. Employment numbers remained weak in the ADP report, and the Labor Department announced that unemployment had reached 9.4 percent after another 345,000 jobs were lost. Also, the Challenger, Gray & Christmas report on job cuts showed that governments have started to trim labor, even though corporate cuts declined. CEO John Challenger said, “The second quarter is typically the lowest quarter of the year when it comes to job cuts. Corporate downsizing may continue to remain slow during the summer months, but if the past is any indication, we could see the pace accelerate again in the latter half of the third quarter through the end of the year.”
How investors view the employment situation will be important for the short-term direction of the market. No one can know the thinking of the hundreds of millions of people that make up the markets, but judging from the news, it seems the herd swung from six months of “end of the world” (September to March) to three months of “it’s not the end of the world” (March to June). Now, the time has come to assess the rally. Stocks, commodities (especially oil, up about 100 percent), high-yield debt and emerging markets have rebounded sharply from their lows. Stocks are trading at 15 times their trailing earnings, so the market is near or at fair value. Continued growth in earnings could be a catalyst for the market moving higher, allowing investors even more opportunity over the next 12 to 18 months.