Since the March bottom over seven months ago, the major stock indexes have rallied an impressive 60%. Certainly, there has been some improvement in our economy since those dreary days where the economic system appeared on the brink of collapse. However, you really must question whether or not the market is getting ahead of itself at this point.
I think it’s fair to say that our economy has stabilized quite a bit over the past six months. We are no longer hemorrhaging jobs at the rate we once were, retail sales have seemed to level off and the fear of major bank implosions has subsided. Yet, as much as I’d like to be optimistic about a strong V-shaped recovery, the reality is it’s not going to happen.
Our economy, like it or not, is driven by consumer spending. This accounts for almost 70% of our nation’s GDP. Therefore, before any sustained recovery can occur people must start increasing the amount they spend. This seems highly unlikely in the foreseeable future due to the unemployment rate…
High Unemployment = No Spending = No Growth
“As long as unemployment is high, consumers are incapable of spending to stimulate the economy. In addition, the inability to use debt and new frugal mentality instilled by the credit bubble is adding to the reluctance to spend.”
“The process of returning to economic equilibrium is going to be a drawn out process. Right now, recovery actually entails reducing jobs to further clean out the excess that had built up. Thus, a period of net job creation can’t be expected in the near future.”
“Investors should be cautious with the over-exuberance being priced into the market. It simply isn’t possible to return to a healthy state until the workforce begins to grow again”
At this time, without net job growth and an abundance of consumer credit our economic recovery is going to be weak. However, this doesn’t mean that the stock market rally can’t go higher. The market will do whatever the market wants to do. A lot of the big players got caught flatfooted and missed the rally. Now these fund managers and hedge funds are trying to play catch up since their returns are less than those of their peers. Momentum based rallies can go on for a long time,but they tend to end badly.
I’m not saying that this rally is all momentum based. We certainly deserved a sizeable move due the improvement we’ve seen since March…but you need to question how much we really deserve based on where we appear to be going.
What shape do you think our recovery will be?
Stevo – I used to think the market cared about the unemployed, not anymore. The market just cares about profits, and the leverage created with a rebound in revenue and less people to pay.
I’m still selling stock, but I’ve almost run out!
FS, You’re right the market does view earnings as more important than unemployment. However, at some point earnings are going to have to be driven by revenue as opposed to cost cutting. That’s when the unemployment situation is going to start to hurt us IMO.
Good to see you’re taking some profits on the way up though. I’ve been doing the same thing.