New Bull Market, Or False Dawn?

Has the stock market finally turned the corner? Is the economy really recovering? Is it time to throw all your money at the market?

Everyone would love to know the answer to these questions–including me–but no one does. Someone may guess (like I will below) and be right, but that will be luck, not skill (that’s why market strategists are like diapers, they require frequent changing, and for the same reason).

Why can’t anyone know if the market and economy are finally recovering? Because it’s too complex. Why can’t I gather enough data to figure out precisely how many inches of rain will land in a square foot in my back yard this month? Same reason: it’s too complex. Knowing all the inputs doesn’t tell you the outcome. Markets are even more difficult to precisely predict than rain, because the weather doesn’t possess freewill, but investors do!

There are strong psychological reasons for wanting to know what the market and economy will do. No one wants the regret of investing and then watching the market tank by 50%. For that matter, no one wants the regret of NOT investing and then watching the market double, either.

The fear of regret drives people to look for all kinds of clues, but such searching and wishing won’t bring the answers. You can’t reap the benefit of market returns if you sit on the sidelines. You have to put your money at risk and then either win soon, or win later. Not a bad bargain, when you think about it.

Okay, enough rambling, what do I think about the market and economy? I believe there are faint glimmers that the economy may be starting to turn. Those signs come in lower claims for unemployment, a slight rebound in factory activity, a pickup in activity in China, better than expected retail sales, and stronger than expected exports.

Do those glimmers mean the economy definitely will recover? No (please reread above if you expected the answer to be yes). There is still plenty of bad news out there, like higher credit defaults, higher foreclosures, more bankruptcies, higher unemployment, weak car sales, etc.

What about markets? Does a market recovery require an economic recovery, first? Probably not. Markets anticipate improving fundamentals and tend to turn up first, usually 3 – 9 months before the economy does. The stock market’s rebound is one of the main reasons many believe the economy may be starting to recover.

I tend to think that the market and economy have yet to turn up, but that’s just a guess. The problems that got us into this situation–housing and credit markets–are still in serious pain. Just because housing starts and prices are declining at slower rates doesn’t mean happy days are here again. The economy and markets will probably recover before housing and credit do, but I think there is still a lot of downside there before things turn up.

Also, the stock market has only been going down for 1 1/2 years. This is the worst economic downturn since the Great Depression, so markets will probably be down longer than usual. The 2001 recession was one of the mildest on record, yet the stock market took 3 years to hit bottom. Granted, valuations were higher in 2000 than in 2007, but that doesn’t account for everything.

Also, the consensus of leading economists think the economy will recover late this year or early next. Those folks are almost always wrong! Guess how many of them predicted this severe recession even with over-extended credit markets and declining housing prices staring them in the face? Zero, zilch, nada, not a one. If those folks didn’t see this coming, then why should I believe they correctly see the recovery? I don’t.

It’s possible the economy could start to recover toward the end of this year or early next year, and that would indicate an increasing stock market now, this summer or this fall. But, the stock market could also go down much further into this fall (2009), spring of 2010 or fall of 2010. Who knows? I don’t, and I don’t know anyone else who does or can, either.

It’s also possible the economy starts to recover only to enter another recession in 2011 or 2012. That’s referred to as a double dip recession, and it happened in the late 1970’s and early 1980’s. That was the worst recession we had had since the Great Depression, until this one of course. A Double dip recession could easily be caused by the Federal Reserve raising interest rates too soon, or by raising them too slowly and causing enough inflation to send us back into a scenario like the stagflationary 1970’s. Let’s hope not (but, hope is NOT a strategy).

The best thing to do is invest wisely in sound, low valuation companies and prepare for the market to be bumpy. No predictions will prevent the market from going up and down. Sitting on the sidelines through it all is a sure-fire way to miss the upswing when it does come–whenever that will be. . .

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.