What the Markets are Trying to Tell Us
After hitting a low below Dow 6,500 in early March, the stock market has rallied 1,500 points to top the 8,000 point mark. This 21 percent one-month rally has been the best since the 1930s. That caused Mad Money’s Jim Cramer to announce “the death of the depression.” Now we are only stuck in a recession. Of course, we were never in a depression. The depression of the 1930’s had unemployment rates in excess of 25 percent while today’s unemplyment figure hovers at 8.5 percent.
Now most of the talking heads agree that the worst is over. Not in the economy, but in the stock market. Those are two different animals. That’s because the stock market is a forward-leaning institution—a forward-looking indicator. The rally in a bear market usually precedes a turnaround in the economy by something like seven to ten months. So while we are likely to see unemployment rates rise to perhaps ten percent, there is a renewed sense of confidence that is beginning to seep not only into the financial markets, but into the overall economy as well. With mortgage rates at their lowest point ever (at around 4.85% for a 30-year fixed mortgage), there are a record number of homeowners refinancing their mortgages (including me). That’s going to put real money into the hands of millions of Americans—and serve as a “stimulus package” of its own.
In addition, all those trillions that are being heaped into the financial and mortgage markets are beginning to make a difference, which is why the markets have rallied and why most CEOs feel that we have turned an important corner. Many feel that star-economist Nouriel Roubini’s prediction was far too pessimistic. He had predicted that the Dow would shed thousands of additional points—to perhaps 4,000— before going into an “L” shaped, or very weak, recovery. I am no Nouriel Roubini, nor do I play an economist in the blogosphere, but on March 12th, in a post entitled Did the Media Help Sink the Stock Market , I suggested that Dow 6,500-7,000 would be a great time to invest. I stick by that statement.
So what are the markets trying to tell us? That there is a light at the end of the tunnel. That we are not going to have a depression. And that there is an end to this recession—and it is in sight. Before rising to Dow 8,000 this week, all of the aforementioned predictions were in doubt. Many economists still believe that the worst is not over. It is likely that the economy is still trying to shake off a multi-trillion-dollar drinking binge; but for the financial markets, I think that the best is ahead. This does not mean that we won’t have some bad days on Wall Street, or that we won’t sink back down into the low-to-mid 7,000s as we “back and fill” and consolidate our gains. We just might. But over the long term, the ones that will be rewarded will be those that hang in there, don’t let emotion rule the day, and buy on the dips. That’s the way it has always been…at least for the last seven decades.