My Four Reasons Why Stocks Will Continue

“Profit Confidential” Column, by Michael Lombardi, CFP, MBA

Did you hear the one yesterday about why the stock market is at a new high for 2009?

A couple of newspapers I read this morning (and Internet news sites) credited statements by two Federal Reserve members with bringing the stock market higher. In specific, a speech by Dallas Federal Reserve President Richard Fisher, in which he stated that interest rates would remain low despite a declining U.S. dollar, because unemployment remained high, was credited with moving stocks higher.

This is all rubbish.

The stock market is a leading indicator, not a lagging indicator. The remarks from Fisher about rates remaining low for a prolonged period is something the stock market is very well aware of. The stock market likes interest rates that are lower and a lower U.S. dollar for the logical reason that companies trading on the market make more money with interest rates that are low and a devaluing U.S. dollar.

I really get a kick from reading business stories and watching financial news programs, as they try to tell us why the stock market is going up. In my business, I try my best to hire people with experience to do their jobs. I never really understood why the popular financial TV shows and major news organizations do not hire seasoned analysts or investors over journalists who know nothing about stocks or the economy — they would be doing their audience a huge favor!

Here are my four reasons as to why the stock market is moving higher:

  1. As simple as it sounds, the stock market always delivers the opposite of what is expected of it. Did anyone expect to see the Dow Jones Industrial Average at over 10,000 when it was trading at 6,440 in March of this year? The answer is NO. And that’s exactly what the market is delivering — what people did not expect.
  2. Technically, the stock market was severely oversold on March 9, 2009. What we are seeing now is a normal rebound for stocks from their March oversold condition.
  3. We are in the midst of the most accommodative fiscal and
    monetary policies of the past 70 to 80 years. Interest rates are at historic lows, the government has poured trillions into the economy to get it going, and the Fed is making money “easy.” It doesn’t get better than this for stocks.
  4. Finally, trillions of dollars are sitting on the sidelines that have not re-entered the stock market. Once unemployment stabilizes further, this money will come into the market, pushing stocks higher, as they force the shorts to cover.

Now here is the caveat, my dear reader. I see the rally that started in March of this year as a bear market rally. At some point ahead, interest rates will need to move back up as inflation sets in and because of the U.S. dollar plunge.

Are we in a new bull market? Of course not. But, as I have been telling my readers for months, enjoy the rally while it lasts and make money from it!

Michael’s Personal Notes:

I found the following words of awareness and caution from one of my co-editors very important and wanted to share it with my readers. The following is taken from a recent e-mail alert released by Robert Appel:

“We just spent several months in the US. Does the typical American understand that his country is on the same path England was 100 years ago when it lost the empire? No.

Does he or she understand that short-sighted and greedy politicians have left the cities and state infrastructure in chaos? No — and PBS actually did a TV special on this, but who watches PBS?

Does he or she understand that the U.S. dollar is dropping and will continue to drop, and that will make everything more expensive and lead within 12-24 months to inflation the likes of which America has not seen for decades? No.

Does he or she understand that, within some 8-14 months, America will have to raise rates (as Australia and Norway have already begun to do)? No.

Does he or she understand that raising rates from historic lows will do additional damage to the stock market (not right away, but with a time delay of several months)? No.”

Where the Market Stands:

The Dow Jones Industrial Average closed at a new record high for 2009 yesterday at 10,246 — the market is now up 16.7% since the beginning of the year. There is not much I can say that I haven’t already said over the past several months. First, I feel sorry for those investors who were scared by the media and “doom and gloom” analysts into buying T-bills, as opposed to stocks at the March 2009 low. Second, I only hope our readers heeded our advice and did jump into the stock market. And finally, until proven otherwise, this “bear market rally” (as I’m defining it) still has life left.

What He Said:

“For the economy, the message from retail stocks is quite clear: Consumer spending, which accounts for roughly 70% of U.S. GDP, is in jeopardy. After having spent like ‘drunkards’ during the real estate boom years, consumer spending is taking the same trend as housing prices, slowing down faster than most analysts and economists had predicted. As news of the recession continues to make headlines in the popular media, the psychological spending mood of consumers will continue to deteriorate, lowering earnings at most high-end retailers and bringing their stock prices down even further.” Michael Lombardi in PROFIT CONFIDENTIAL, January 28, 2008. According to the Dow Jones Retail Index, retail stocks fell 32% from January 2008 through November 2008.