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The long and mostly uninterrupted rally took a breather this week as investors wondered if the economic recovery might be losing steam. Some wonder if the market might be ahead of itself, given the anemic nature of the recovery. But it is not news that the recovery is going to be bumpy and uneven. The perennial doomsayers continue to harp on the bad and the perennial optimists harp on the good. Today, we’ll simply report the week’s economic news and let you decide.

The stock market, since early March continues to suggest economic recovery. But this week it took a pause as the S&P 500 declined some 1.8%. Still, the average is 55% above its March 9th lows. With the huge rally, consensus seems to be building that the market is ahead of itself. Some even argue that we are in a sucker’s rally or a bear market trap soon to collapse.

With only a small bobble yesterday, the market as measured by the S&P 500 roared another 2.5% higher this week. It is some 7% higher this month, but still 32% below its peak on October 9, 2007. Good news from various economic indicators and positive comments from Central bankers and economists have boosted the confidence of investors. On Tuesday, Mr. Bernanke confidently declared that from a technical perspective, the "recession is very likely over at this point." But he added that tight credit conditions and unemployment will keep the recovery muted. The consensus view is that the economy is in recovery, but views diverge on the whether it is sustainable. The threat of government stimulus being removed prematurely and the notion that consumer spending will remain weak through next year weigh heavily on the prospects of strong recovery.

Three of us met at the dock, one hot summer morning, ready for the day’s adventure. Pete, Reid and I had been intrigued by news in town of the discovery of a sunken German U-Boat, completely intact and sitting upright on the bottom. Details of her location were closely guarded because of her salvage value.

The week’s economic data continues to point to recovery, but investors worry whether it will be strong enough to support the stock rally since March 9th. The S&P fell 2.6% this week as of yesterday’s close. September is historically the worst month for the stock market. In fact as Ed Yardeni notes, since 1926, September is the only month with a negative average return. Investors lose an average of 1% during September compared to a 1% return for the other 11 months. So the market may be in a holding pattern for a while. This is a good time to forego analysis of the various economic and market wiggles to take a broader and longer perspective on investing.

On Wednesday our nation was saddened by the death of Senator Edward Moore “Ted” Kennedy who succumbed to brain cancer in Hyannis Port, Massachusetts. With 47 years of service in the US Senate he was one of the most influential and accomplished lawmakers of our time. Ted Kennedy was the only one of four distinguished brothers to die of natural causes; President John F. Kennedy, and Senator Robert Kennedy were assonated and Joseph Kennedy Jr., a naval aviator, was killed in action during World War II. The service and sacrifice of this remarkable family to our country is gratefully acknowledged and deeply appreciated.

The persistent rise in stock prices rolled on this week as investors continue to believe the economy is rising from recession, despite ever-present news of bank failures, sluggish consumer participation, and huge looming federal deficits. In spite of it, the Dow Jones Industrial Average advanced yesterday for the eighth straight day, each to new highs for the year, and representing the longest winning streak since April 2007. The MSCI World Index of 23 developed nations added 0.9% yesterday extending its seventh weekly gain. Copper, among the very best indicators of global growth, jumped to the highest intraday price since Oct. 1st on the London Metal Exchange, while oil climbed 0.9%. The early re-appointment of Ben Bernanke to a second term also gave markets a boost.

Our government was designed with great care by the Founding Fathers to protect “We the people” from the tyranny of majorities or loud and powerful minorities. Our system of “checks and balances” is not perfect, but it has served an ethnically diverse nation well these 230 plus years. However, one glaring omission threatens to ruin it all. Fundamentally understood and respected by the Fathers, but nearly lost on today’s leaders is the idea of fiscal discipline, or spending no more than is received. Indeed today’s Senators and Congressmen are richly rewarded by “we the people” through longevity of office and growth of power, to take from one class and give it to another. Our leaders write larger ‘checks’ against ever-decreasing asset and ever-increasing liability ‘balances’ with no end in sight. Perhaps “we the people” are finally rising up to say enough is enough? 

During the lifetime of the “Greatest Generation” the market has fallen an average of 40% fourteen times, or once every 5.7 years. In fact the odds of an investor experiencing a loss in any one year are 1 in 3.9. The latest drop from May 19, 2008 to March 9, 2009 took us down nearly 53%. It’s easy to see why so many former investors have been driven to the sidelines. Yet why do others remain steadfastly invested? In short they seek the 11.5% average annual return the market has provided for the past 40 years, along with the added benefit of ready liquidity. They understand the market, while seductively steady much of the time is prone to major emotional swings which require patience and fortitude to endure. Perhaps knowing that the average return a year after a market trough is 46% helps assuage the pain of declines, while understanding that ‘irrational exuberance’ will eventually lead to a hangover helps them remain on course while others fall prey to their emotions.

The best news of the week comes today as the Labor Department says that job losses are slowing. Payrolls fell by 247,000 workers, after a 443,000 loss in June. The jobless rate dropped to 9.4% from 9.5% last month. It is the clearest sign yet that the worst recession since the Great Depression is coming to an end if it has not already ended. Stocks jumped on the news taking the S&P 500 to a new high since the March 9th low. The index is now up more than 50% since that watershed day when Citigroup CEO Vikram Pandit told employees in an internal memo that the bank was having its best quarter since 2007 as well as comments from regulators suggesting that they might reinstate rules to limit short selling. Nearly $4 trillion in value has been returned to investors during this timeframe.

Maybe just maybe Mr. Market has it right and all the economists have it wrong. Stocks are on a tear and investors seem to be betting on a more robust economy than almost any economist or market strategist. The widely touted date for the market’s low was March 9, 2009 when the S&P 500 closed at 676.53. But the actual flush-out of sellers occurred three days earlier when the index reached a devilish 666 on 3/6/9. Eerie numbers, right you “Code” fans? Today it trades at 989, just 10 points from 999. Hmmm?