We are in a recession and the economy is looking very bleak. From accelerating job losses in many industries to the potential bankruptcy of GM there is a lot of bad news to digest out there. So this being what it is, why is the stock market rallying like nobodies business? The S&P 500 index is up a whopping 23% since just March 9.
The Wall Street Journal has an interesting article in the 'Smart Money' section of their website titled Dow 8,000 - 5 Reasons Driving The Rally. This article outlines 5 reasons why the market is rallying despite the despair saturating the economy.
1. G-20 Boosts Global Confidence (THUMBS DOWN)
The appearance of a coordinated response to the global financial crisis is apparently buoying markets. I would sell on any market strength that is generated by this fluff. This is all about perception and these meetings tend to not churn out any definitive actions. Global leaders have no choice but to give the impression that they are working together and on the same page.
2. Accounting Change Bolsters Balance Sheets (THUMBS UP)
Although the change to allow financial institutions looser criteria in order to value their hard-to-value assets is kind of like painting grass green, it might be just what these institutions need to finally get out from under themselves and start serving the public. This may signal that the bottom has been seen in stocks like Wells Fargo and Bank of America.
3. Team Obama Gets Act Together (THUMBS DOWN)
TARP, TALF, PPIP Burt & Ernie might have just as much luck throwing these acronyms at the market as Tim and Barack. Could they be stoking future inflation as well?
4. Blue Chips Too Cheap To Resist (THUMBS UP)
It always sounds silly to say that, wait a minute, wait a minute....right now 'blue chips' are too cheap. Many large, stable dividend growing companies have been pretty cheap for months. Stocks with nice dividends that shouldn't be cut should be bought when times are tough not when things look rosy.
5. The Early Bird Gets The Worm (THUMBS UP)
I do believe in the general thought that some great gains in the market can be missed out on by those who sell and attempt to get back in when things turn around. The markets can't go down forever, and nobody wants to miss the parade.
It is my believe that housing stats and the fate of GM will also be huge factors to where we are going in the market in the next six month.