Is the stock market's recent strength a dead cat bounce or did the market really make its bottom and is now beginning to recover? The answer is anyone...
Is the stock market's recent strength a dead cat bounce or did the market really make its bottom and is now beginning to recover? The answer is anyone's guess,
but there are some interesting data now appearing about the economy.
Every opinion that I've been getting is suggesting that the recent strength in stock prices is just a bear market rally and that this uptick can't last. I was very surprised, however, by the new construction numbers for February suggesting that construction of new homes and apartments jumped 22% from January. Consensus estimates were for another decline. Applications for building permits also gained some three percent.
Also interesting is the return of some price inflation in the economy. The Labor Department reported that wholesale prices moved slightly higher in February, up 0.1% due to an increase in energy prices. Core inflation, which excludes energy and food, edged up 0.2% in February, after a 0.4% increase in January.
Fed Chairman Bernanke recently said that the single most important industry to the economy's recovery is the financial sector. Whether you like it or not, what happens on Wall Street affects what's happening on Main Street. What the banking industry needs is a return of confidence. As banks begin to loan money to each other, the flow of credit trickles down to Main Street and the real economy.
In my experience, Wall Street is usually pretty quick to heal itself and, with all the government bailout money for the financial industry, a recovery in that sector should be achievable in the near term. Already, we're seeing some of the big commercial banks report that they're profitable so far this year.
So, there is a recovery taking place on Wall Street in the banking sector. Interest rates are very low and there is some renewed price inflation at the wholesale level. This all seems like the beginning of a recovery to me. Or perhaps it is just the end of the severe contraction.
I have no doubt that the stock market is going to lead the economy in its recovery. The stock market tanked last autumn, bounced back a little, and then retested its low. There's no doubt in my mind that we're now in the "bounce back a little" stage once again.
With so much money floating around in the system now, anything is possible. I don't know where the stock market is going to go over the coming quarters. I do think it's reasonable, however, to expect a decent rally even if it is still a bear market
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