It was an impressive and unexpected 11% surge in stocks on Tuesday. The robust buying was more unexpected given that investors were faced with some bad economic and housing news. The strong spike shows the interest in the market and the fact there is money waiting to come in and buy what has become an attractive market based on valuation. The valuation is based on forward earnings that may or may not be realized. Should the global economies freeze, for which is a good chance, this could easily translate into weaker demand for American goods and services.
Also on the consumer side, there is still concern that consumers will continue to hold back on big-ticket and discretionary spending in light of the economic woes, the housing market crunch, and a softening jobs market that could see a rise up in the unemployment rate heading into 2009. These are valid concerns that must be addressed and that could impact stocks.
On Wednesday, the Commerce Department released a strong durable goods order report that pointed to a 0.8% increase, up from a 5.5% decline in August and better than the decline expected by economists. Yet this is only a single reading and should not be considered a turning point for the economy. The third-quarter GDP to be released on Thursday is expected to show a decline of 0.5%, followed by declines in the fourth quarter and the first quarter of 2009. If this occurs, the country would find itself in a technical recession.
The reality is that we are in the midst of a nasty and devastating bear market. The weak consumer confidence report and declining housing prices are key concerns going forward, as I feel the impact on the economy could prove to be much more negative than thought.
We do not believe the severity of the housing recession gets enough attention given the credit and economic concerns, yet the continued decline in home prices means less property wealth and that consumers will be wary to spend. And this makes me nervous.