The stock markets rally off last Novembers low was certainly not created by any improvement in the economy. The economic reports were becoming increasingly worse. Job losses were accelerating.
But the market was able to begin climbing that 'wall of worry', fueled only by hope (and promises from both parties) that no matter which party won the election change was on the way. A further big stimulus plan would be launched immediately after the inauguration and new cooperation would take place between political parties, whi
h, combined with last year's huge bailout efforts, would finally begin to make a difference.
But after a rally of 24% by the S&P 500 off the November low, the market rolled over in the first week of January and was down for four weeks in a row. In those four weeks the market gave back much of the rally, and raised concerns that the November lows would be at least retested and perhaps broken.
As I have been saying for the last month on my daily blog, I believed the catalyst for the pullback was not the worsening economic reports, but that the market was no longer able to climb that wall of worry, because hope had been taken away. It was suddenly realized that the new Administration was not going to be able to hit the road running, as the market had hoped. The confirmation of the new Treasury Secretary and the rest of the new economic team had been delayed. The new stimulus package was obviously going to take longer than expected, would get bogged down in Congress, and no one knew what the final version might look like. (The market hates uncertainty).
Over recent trading days the market has had considerable day-to-day volatility, and it was also related primarily to whether investors can feel hopeful, or not, about help being on the way.
The Dow closed down triple digits on days when rumors were that the stimulus plan was bogged down in the Senate, and closed up triple-digits on days when the rumors were that progress was being made.
The markets action on Friday, a big triple-digit gain in spite of the ugly jobs report Friday morning (that 588,000 more jobs were lost in January) provided still more evidence of the influence of hope and optimism on the thinking of investors. Fridays big rally in spite of the ugly jobs report was obviously fueled by the signs that the stimulus plan might be passed by Friday evening.
There is something important to learn from this, for politicians and the media.
Providing the nation with hope and optimism, rather than stressing the negatives, can help a lot in influencing the market and the economy. Perception is of as much importance as reality.
Two bouts of hope and optimism since last November have created two periods of rally, two periods of willingness by investors to buy in spite of continuing bad economic news. Hope and optimism could probably also influence consumer spending and lessen the severity of the recession. After all, the data is showing that even those with money and good jobs are not spending, hammered down by the pessimism and fear flooding over them in the media.
All last year I predicted a market low in the October/November timeframe, and then a substantial bear market rally off that low in the markets favorable season (which doesnt end until April or May). I have not given up on that expectation.
But for almost two years I have also been predicting a recession and a bear market, neither of which will end until sometime in 2010 (next year), with any rallies being bear market rallies. And nothing has changed my mind about that either.
But perhaps some expressed hope and optimism by politicians and the media, rather than stressing the negatives, could lessen the severity of both the bear market and the economy. That seems to be the evidence.
Just a thought.
Sy Harding publishes the financial website www.StreetSmartReport.com and a free daily Internet blog at www.SyHardingblog.com. In 1999 he authored Riding the Bear &' How To Prosper In the Coming Bear Market. His new book is Beat the Market the Easy Way! &' Proven Seasonal Strategies Double Markets Performance!
About the Author:
Sy Harding is CEO of Asset Management Research Corp., author of 1999's Riding the Bear and 2007's Beat the Market the Easy Way, editor of www.StreetSmartReport.com, and www.SyHardingblog.com.
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