Stock Market Temptation

The floodgates of help from the government continue to open in the United States. It’s now believed that Congress wants to use the remaining $350 billion of the $700-billion Troubled Asset Relief Program (“TARP”) to reduce interest rates on consumer mortgages and to forgive some mortgage principal.

As we all know, the majority of the first half of the TARP bailout went to boost the capital bases of banks. Now, Congress wants to put the focus on helping consumers that are in jeopardy of losing their homes.

In modern history, the actions of the Federal Reserve have worked well to bail out the economy when it looked poised for recession. After the tech bubble of 1999, the Fed was successful in maneuvering monetary policy to thwart a damaging recession. Similarly, after the terrorist attacks of 2001, the Fed was again very successful at saving the economy from a severe downturn.

The current economic crisis, for the variety of reasons you have read in this column over the year, is more severe than the tech bubble or the terrorist attacks. And the question becomes: Can the Fed, using all the tools available to it, get us out of this recession or will the Fed’s actions become futile, and the downward spiral of deflation and near depression continue for years…just like it did in Japan?

President-elect Barack Obama’s Council of Economic Advisors is now expecting three to four million more American jobs lost in 2009. Hence, they are working on an even more ambitious stimulus package. In my belief, at one point, all the efforts of the Fed and government will kick in to jump-start the economy. But it will not happen overnight. Given the length of the economic boom the U.S. experienced, the contraction will be long.

The stock market, as a leading indicator, does not seem concerned at the moment about the three to four million more job losses that the Obama team expects in 2009 and the eventual economic impact. Has the stock market already discounted the worst? It’s also very promising that the Dow Jones Industrial has yet to break below its 2002 low. After all, aren’t these economic times a lot worse than what we saw in 2002?

There is a great temptation for contrarians these days — the temptation to jump into the stock market with both feet. For me, it is still too early to call the bottom of the stock market. In fact, we could be in classical bear market trap.  For the benefit of my readers, I continue to study every detail of the stock market’s action, looking for clues as to where we are headed. Great fortunes will be made in this recession by buying at the bottom — that goes for the stock market and real estate. The key is determining when that bottom is here. And that’s something I’m working on every day for my readers.