Blog

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?

It’s all too easy to project our current circumstances into the future and assume that things will remain the same forever. We find this phenomenon particularly true the longer a current trend, good or bad, persists. Remember how the “Internet changed everything?” In the late nineties stock valuations were at all-time highs, ‘twenty-somethings’ became overnight billionaires with dot.com ideas that required an ever increasing suspension of reality (and gravity). Even seasoned CEO’s who remain heads today of companies like Cisco, Intel, Apple, and Broadcom said then, that they could barely believe what was happening themselves; the orders were there – the growth was real. Then, all of a sudden the orders went away. The Y2K bug had not bitten. Information companies were indeed subject to the same business cycle as the rest of the economy. And the silliness of most new dot coms was exposed. It all came crashing down. Wall Street analysts who had months earlier championed the record high stock multiples as the new reality were summarily fired. The few who were too deeply involved with large investment banking customers stayed on, but quickly changed their tune. The reality changed overnight.

Equity markets continue to cool as investors consider whether the meteoric rally starting in March was overly optimistic. The S&P 500 run-up of nearly 40% from March 9th to June 12th is now 6.8% below its high point. The MSCI Emerging market index is 8.75% off its high, also reached on June 12th, but that index rose 72% from its depths in March on signs of greater economic strength in developing economies. It is becoming clear that the world is emerging from the worst economic slump since WWII, but just how fast remains in question.

Stocks posted their best quarter since 2003 as the second quarter came to an end. Stocks held on to the majority of their increase as the S&P 500-stock index finished the quarter up 15% and the year up 1.8%. As investors who missed the rally buy on dips, the vast majority feel the best is behind until the economy can prove it is up to expectations. The next big test is corporate profits for the second quarter which will be released in the coming weeks. They must match or beat analysts’ projections to sustain stock prices at current levels.

In the days of sailing ships one of a captain’s greatest fears was being becalmed in the Doldrums. Ships could be trapped for weeks without sign or hope of a breeze powerful or consistent enough to propel them safely out of the morass. These regions exist at the earth’s equator and are characterized by extreme low pressures, where the prevailing winds are calm and variable.

After trading in a narrow range from the beginning of June, stocks took a 3.7% dive on Monday and Tuesday as investors focused more on the disappointing economic news than on positive. However, the down days were on relatively light volume and there was little selling conviction evident.

Markets largely tracked sideways this week as investors weighed improving economic signs against concerns of rising interest rates, inflation, and a falling dollar. The Treasury successfully completed a record offering of debt including the reintroduction of the 30-year bond. Earlier this week Treasury announced that they would allow nine banks to repay their TARP money. The move reveals improved internal and regulator confidence in their stability. The money is also freed for other uses. Jobless claims, retail sales, and other economic reports continued trending more positive.

It can be argued that since September of 2008 the stock market has experienced two distinct bear markets; one starting in September 2008 and one starting February 10th 2009. It could also be argued that three-month 40% rally we now enjoy eliminates the second bear market leaving only the first to battle.  

As the world recession eases there is much talk of a “new normal,” in the global economy, characterized by heightened government regulation, slower growth, and a shrinking role for the US. Anyone familiar with the history of booms and busts hardly disagrees with the premise, especially given the extensive damage wrought on the worlds’ credit infrastructure, the breakdown of fundamental investor trusts by regulators who increasingly blur the lines between public and private rights, and a consumer who is too tapped-out, over-leveraged, and over-taxed to consume us out of this one.