After a historic 17-month bear market that witnessed a 57 percent decline in the S&P 500 index, stocks seem to have put in a bottom of sorts. So, is it over? Have we emerged from the valley of the financial shadow of death?
Look, no one has a crystal ball. But we do have opinions. And my opinion is, no. It is not over.
The problems of our economy are structurally deep and are the after-effects of a 25-year binge of overspending and over borrowing. When you look at the remedies being thrown out by Washington (just any and every policy to promote a resurgence of 1. lending, 2. borrowing and 3. spending — another drink anyone?), it doesn’t take too long to realize that we truly have fallen down the rabbit hole and are now standing on the other side of the looking glass.
Investors are desperate to grasp at a straw of hope. We so want to believe that the recently announced treasury plan — the financing of purchases by private investors of toxic bank debt — will do the trick. Add to that indications that the rate of decline in our economy is slowing, and many are excitedly exclaiming that the worst is behind us. Recovery is surely just around the corner!
Let me be blunt about this. In my opinion, it’s not. We will likely not see a sustainable economic recovery until there is truly a bottom in our nationwide housing market. And that is still somewhere out over the horizon.
It amazes me how under-reported the next wave of mortgage resets (so-called “Option Adjustable Rate” mortgages, as well as Alt-A mortgages) is. In fact, this second wave of resets — made on loans that originated from 2005 through 2007 — is just now starting and has the potential to dwarf the real estate loan losses from the first wave of bad sub-prime mortgage loans. And don’t even get me started on the commercial real estate mortgage market.
So why is the stock market rising? In my opinion, it is rising on anticipatory hope. We want the worst to be over. We’re really tired of the bad news. This is entirely understandable. I’m tired and so are you. We want things to be better now. We hope they’ll be better soon.
But, hope is not an investment strategy. Yes, the market is now rising. And it will likely continue to rise more. It will rise until we know whether or not the latest plan out of the Geithner treasury office is effective in resuscitating Main Street. And that information won’t be available for months, at best.
So, in the interim, the market rises on the back of hope. But know this: if the Geithner plan doesn’t work, this rally will have been built on a false hope. And that opens the door to so many more columns.