For those of you interested in business and the stock market, David Callaway at Marketwatch.com has good news and bad news. Here's a synopsis:
Wednesday's 108-point run was the best day of the month for the Dow, and it's now up more than 3% for September, 11.6% for the year, and nearly 50% from its bear market closing low on March 9.
But just as stocks couldn't go straight down to zero this spring, a favorite prediction of the bears and the shorts at the time, they can't go straight back up either. We've no better chance of hitting Dow 14,000 again this year as we had of hitting Dow 3,500 in March, when the average got below 6,500.
Earnings aren't good, Washington is in typical gridlock on health care and financial regulation, banks continue to fail at an alarming rate and unemployment is approaching 10%. Yet some economic numbers do show that the worst of the recession is over, a theory which garnered a modicum of credibility this week when Federal Reserve chief Ben Bernanke said the recession has "likely" ended.
Still, it's hard to see this rally as anything other than a momentum bandwagon right now. Online brokerage trading volumes are surging at Charles Schwab Corp., E-Trade Financial, and TD Ameritrade Holding Corp. and small investors are jumping back into funds and especially exchange-traded funds.
At some point, a correction is inevitable. And arguably, it's OK to just ride this out until that day comes. Might be next week; might be next year. When it does come, though, it will come with a loud crack in equities, as all the positive momentum behind the market right now suddenly shifts to an embarrassing, emperor-without-clothes type of feeling, which will precede a rush to sell.
That ultimately will be healthier for the market than the current sprint to Dow 10,000, though it might not feel like it at the time. By the end of the year, I think we'll be higher than we are today, likely above 10,000. December in particular could be a strong scene-setter for a recovery run in 2010.
So what's the take home message? It appears to be that the road ahead for investors (and businessmen and women) is going to be bumpy, but that if you just ride it out you'll be fine. I'm not an economist but I have some doubts about this. It may be that over the relatively short term things will be fairly positive, but what happens when our huge deficits start building in a year or so, and we have to pay on the debt. The only way we'll be able to do that is to impose onerous taxes on businesses or print money which will generate inflation. Either course will kill the markets. It seems inevitable that one or both of those alternatives lies in the not so distant our future, so I wonder why Calloway thinks that 2010 will be a year of recovery.
Perhaps the only thing that's going to be recovered in 2010 is the good sense of the voters who will decide to cashier the people who got us into this mess.RLC