Being Street Smart
The Market
Will Respond
To Economic Outlook, Not Terrorism
By Sy Harding, editor
Street Smart Report Online
During the 18-month bear-market, investors have
been treated to several impressive market rallies, the result
of temporary improvements in the economic outlook, each unfortunately
followed by renewed downside when the economic outlook clouded
over again.
The excellent
rally last April is a case in point. The S&P 500 and Nasdaq
gained 18% and 41% respectively in that rally, when first quarter
economic numbers came in better than expected, raising hopes
that the economy would be in recovery mode by the second half
of this year. But when numbers again turned negative in May and
June, the rally ended, and as corporate warnings and lay-offs
increased, pushing expectations for economic recovery off into
next year, the market's decline became ugly again.
I expect that even under the new cloud of terrorism fears, the
market will continue to respond normally to its outlook for the
economy six months or so ahead, and not to those fears.
At least that's
been the situation so far. The economy was already headed into
recession prior to the events of September 11. As terrible as
they were, those events didn't change the outcome but only accelerated
the arrival of the recession, simultaneously accelerating the
stock market's decline, which was already underway in anticipation
of a recession.
However, those
events also sparked such a tremendous fiscal, monetary, political,
and spending commitment from Washington, to re-stimulate the
economy, that in recent weeks the market has been able to anticipate
an earlier end of the recession than it previously could.
And so we saw
an impressive rally over the last three weeks, with the S&P
500 and Nasdaq gaining 14% and 19% respectively, putting them
back to their levels prior to the events of September 11, even
as the terrorism fears grew.
That's not to
say terrorist events won't have short-term effects each time
they take place. For instance, look at how the market acted on
Friday. Most market analysts agreed before the market opened
that the significant rally of the last three weeks had the market
temporarily overbought, and due for some consolidation, as short-term
traders would take their profits. And indeed the market immediately
ran into selling Friday morning and was declining on its own
when the news of anthrax scares in New York hit the tape just
before noon. The result was that the market decline accelerated
for awhile. But just as with the economy's move into recession,
the market's decline on Friday was taking place anyway, and was
only briefly accelerated and exaggerated by the anthrax news,
before recovering to its level prior to the news.
If I'm right
that, in spite of the terrorism threat, the market will continue
to respond primarily to the outlook for the economy, then investors
should be able to stick with normal economic and market analysis,
keeping the background news in mind only as likely to cause additional
short-term volatility.
Meanwhile, opinions
among analysts as to whether it's time to anticipate an economic
recovery only six months or so out, are equally divided at the
present time. Justin Lahart, associate editor at TheStreet.com
puts the bearish view this way, "There's nothing you can
say to make the U.S. outlook seem better now than it was before
the attacks. We've gone from a nation at peace to a nation at
war. From a country that was skirting recession to one that is
in one."
The bullish case says that for more than a year corporations
and investors have complained about the lack of 'forward visibility'.
The economy was sliding toward recession with few indications
of what could turn it around, and when that turnaround might
take place. But now, with the huge efforts coming out of Washington
to get the economy turned quickly, a case can be made for recovery
to begin as soon as the first or second quarter of next year.
The quality
of the buying in the current rally seems to support the bullish
case. Not the one-sided rush back only into tech stocks that
has been the earmark of most rally attempts since the bear market
began, but a broad-based rally, led if anything by the financial
stocks, typical of a market looking beyond just a rally, to the
next period of economic growth.
It has also
been impressive how market psychology seems to have changed to
being able to shrug off the continuing bad economic news. But
that psychology would have to continue for some time if the market
is correct this time in anticipating the economy will bottom
six months or so from now, since obviously the economic news
would continue to be bad as the economy continues to slide away
toward that bottom.
In any event,
the last three weeks have been the most encouraging in some time,
and coming just as the market enters its favorable season of
October to April, it should have investors' attention.
Editor's Note:
Sy Harding is president of Asset Management Research Corp., 169
Daniel Webster Hwy., Meredith, NH 03253, publisher of The Street
Smart Report, 1 year, 17 issues, $225 (now in its 14th year of
exceptional market research for professionals and serious investors)
and The Street Smart Report Online at www.StreetSmartReport.com.
Mr. Harding has been consistently ranked in the Top Ten Timers
by Timer Digest for the last 10 years. He authored the
book, Riding the Bear How to Prosper in the Coming Bear
Market, $12.95. In Riding The Bear, Mr. Harding explains not
only bear markets, but how bull and bear markets get started
and end; how public investors can break their pattern
of only becoming interested in bull markets in their final stage,
get killed, and then are too scared when the next bull market
begins. He explains in plain English how the market reacts, how
cycles work, and how to take advantage of them to hold onto your
bull market profits - and actually increase them during
a bear market. Harding also explains the Seasonal Timing System
in detail. Available at book stores, and Barnenoble.com or is
FREE as a bonus with a subscription to Sy Harding's Street Smart
Report.
