 |
|
 |
Is the Stock Market Rally for Real?
By: Dr. Charles Lieberman
Date: 5/26/2009
Doubts have been expressed over the stock market's sharp rise since the lows of early March. Is it a bear market rally or the start of a bull market? The answer to this question depends on one's view of the underlying economy. Those who believe the economy will remain mired in its year and one-half slump, or will weaken even more, expect stocks to renew their decline. Those who believe the economy is in the process of bottoming and will start to recover this summer think the rally is well grounded. We are in the latter camp.
Markets look ahead, so the sharp rise in stock prices since early March is a clear indication that investors think an economic recovery lies ahead. If the economy weakens again, the market rally will prove ephemeral. So, why should we think that economic expansion will soon resume? Forces promoting economic recovery include a highly expansionary fiscal policy (domestically and internationally), low interest rates that is enabling households and companies to refinance cheaply, a bottoming of the housing market, ongoing significant improvement in credit availability, and a sizeable increase in output to halt inventory liquidation.
The U.S. fiscal stimulus package is a textbook policy response to recession, even if conservatives and liberals differ sharply over its composition. Moreover, such policies are widespread throughout the developed world and also in many developing countries, notably China. While these policies are not coordinated, they are synchronized to the benefit of all. Similarly, monetary policy is also quite expansionary on a global scale. Mortgage refinancing is lowering household monthly costs, while enabling new buyers to enter the market. Businesses are selling record amounts of bonds to rollover maturing debt or pay off short-term financings, including commercial paper and bank loans. Vulture funds are buying everything being dumped, including securities, foreclosed homes, and failed banks. Everyone is in the mode of improving balance sheets as rapidly as possible.
The dynamics of the business cycle is also moving towards expansion. Inventory liquidation has been massive, almost $112 billion at an annual rate in Q1, reducing Q1 growth by 2.8 percent. If inventories stabilize over the course of a full year, GDP would be increased by a full percentage point for the entire year (or by 4%, if it happened in one quarter). Existing and new home sales have flattened out, as has new single-family home construction. Nothing is assured, so the debate will continue, but the turning process does appear to be underway.
Download this article in PDF Format
|
|
