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Not Out of the Woods Quite Yet
By: Dr. Charles Lieberman
Date: 4/6/2009
It is difficult and even undesirable to put a positive spin on the payroll employment report for March. It was so dreadful it should reinforce the judgment of government officials, domestically and internationally, that stimulative policies are needed to get an economic recovery going. We are clearly not there, yet. The counterintuitive rally in stock prices suggests that investors believe a recovery lies ahead, which is somewhat surprising given widespread negative sentiment. That remains the most likely outcome, despite the weak economic data.
Many people dismiss the S&P 500's 24.5% rally off its March 9 low as just a typical bear market rally and fear new lows will occur in the coming months. After the experience of 2008, it would be foolish to dismiss this possibility out of hand. Still, valuations are very cheap, very large fiscal stimulus policies have been passed by Congress, and the Fed is engaged in a quantitative easing policy that has pushed down mortgage and other borrowing costs. It sure seems like the cavalry is riding to the rescue.
Risks do remain high, however. Credit market conditions are vastly improved, but hardly normal even now. Credit availability is also not very good. Still, the trends are moving in the right direction. It is becoming more difficult to find attractive priced bonds, unless there's an unfavorable story associated with the borrower. Bond issuance has surged and the new supply has been gobbled up by investors looking for safe investments that are unaccompanied by a long-winded explanation on why the borrower will be able to repay. Whenever there are doubts, yields are notably higher. Still, the markets are unfreezing. A few real estate investment trusts have sold secondary equity offerings, causing their bonds and stocks to rally. Finding value in the bond market is not as easy as just a few weeks ago.
After four consecutive weeks of a rising stock market, it would not be surprising if the market weakened anytime soon. Still, as governments make progress in unfreezing credit markets and green shoots continue to appear in the economic data, there are good reasons to think that conditions will improve in time. So we expect the equity market to work its way higher, although with plenty of volatility. Hopefully, those green shoots will overcome the negative news that still remains part of the economic landscape.
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