Stimulus Coupled With Strong Stock Market Performance Creates Bullish Outlook

William Patalon III

By William Patalon III
Executive Editor
Money Morning/The Money Map Report

Is it “Bull Market 2009?”

The answer to that question depends on whether you believe the three-week surge we’ve just been through is the start of a prolonged advance for U.S. stocks, or was just the kind of “dead-cat bounce” fake-out move that temporarily interrupts a protracted bear-market decline.

It’s not an easy call to make, although all the stimulus, bailout and fix-up-plan money flowing into the U.S. financial system certainly makes a strong case for at least a near-term bull-market advance.

Let’s look at some numbers.

The Standard & Poor's 500 Index last week gained ground for the third straight week, pushing it near its biggest monthly advance since 1991, with investors sparking a rally after deciding a government plan to eradicate toxic banking debt was actually well engineered.

“The market tends to respond when there's less uncertainty, and [the details of this plan] cleared up a little bit of the fogginess,” Craig Hodges, fund manager with Hodges Capital Management in Dallas, told Bloomberg News.

Noted Hodges: "People thought this was a pretty decent plan, especially compared to a lot of the other alternatives."

The S&P 500 closed Friday at 815.94  – gaining 6.2% for the week – and its 2.03% loss Friday was its only down day of the five. That broad U.S. stock index zoomed 7.1% last Monday, the fourth-biggest daily advance since the 1930s, and a rally that underscored investor backing for U.S. Treasury Secretary Timothy F. Geithner’s plan to draft private-sector investors to finance as much as $1 trillion in distressed bank assets.

Investors’ speculation that government efforts to jump-start lending and end the recession caused the S&P to soar 21% from a 12-year nadir set March 9. That's the biggest 14-day rally since 1938, S&P analyst Howard Silverblatt told Bloomberg. A bull market is defined as an advance of 20% or more.

The advance has been broad-based, always an important consideration when attempting to determine whether a market move is a true bull surge, or just a bear-market head fake, Money Morning reported last week.

The Dow Jones Industrial Average rose 6.8% last week, closing at 7776.18. The tech-laden Nasdaq Composite Index advanced 6%.
With the Dow still down more than 40% from the record highs set in 2007, and the U.S. economy in a recession that’s lasted more than a year, can investors really consider the recent rally as “bullish?” Again, that’s a real possibility, since stocks tend to rebound ahead of the economy.

Market Matters

After announcing the basic details of the public/private venture early last week, Treasury Secretary Geithner added some details as the week moved along. PIMCO, the world’s largest fixed income manager, revealed its intent to participate, and Morgan Stanley (MS) and others threw their support behind the program. Although some economists remain skeptical, investors liked what they heard and sent the Dow skyrocketing the day of the announcement.  Geithner found that his image had been suddenly transformed from a stumbling and fumbling bureaucrat to something more akin to a rock star.

Riding his newfound popularity, he announced a plan to completely revamp the entire financial system, complete with an expanding oversight role for the Treasury Department and the Federal Deposit Insurance Corp. (FDIC), including stronger regulations for hedge funds and firms deemed “too big too fail.”  U.S. President Barack Obama met with the nation’s top banking executives to discuss the administration’s proposals, the financial “stress tests” that will be initiated in April, and compensation/bonus issues that have raised the ire of the American people.  Speaking of compensation (and public outrage), a financial publication reported that the Top 25 highest-paid hedge fund managers together earned $11.6 billion in 2008.

In non-financial news, Best Buy Co. Inc. (BBY) raised its outlook for annual profits; International Business Machines Corp. (IBM) laid the groundwork for future layoffs; and FedEx Corp. (FDX) decided against buying 30 new airplanes until the economy rebounds.

Economically Speaking

Most analysts believe the sector that started this whole economic mess eventually must lead the country back into recovery.  Finally, a few signs have emerged that housing may just be on the mend.  (Of course, it took a dramatic decline in property values and home prices for this renewed activity to occur.)  In February, both existing home sales (+5.1%) and new homes sales (+4.7%) unexpectedly jumped as homebuyers took advantage of foreclosures and some bargain basement prices.  Additionally, the economic stimulus package provides tax relief to eligible first-time homebuyers, and, undoubtedly, these sales numbers include more than a few folks who finally are able to achieve the American Dream. 

Hopefully, the renewed activity will serve to benefit the economy as a whole in the current and future quarters, as the gross domestic product figures (GDP) 2008 were finally finalized. The U.S. Commerce Department downwardly revised the fourth quarter GDP again (-6.3%), though some economists breathed a collective sigh of relief that the release was not worse.  Personal income rose for the second month in a row, another positive development, especially since the mighty consumer contributes about two-thirds of the growth of the economy.  Manufacturers also got some good news during the week as durable goods orders in February surprisingly soared 3.4%, breaking a six-month losing streak and offering purchasing managers a bit of encouragement. 

In global news, Obama heads to London in the days to come to meet with his foreign counterparts and debate the ills of the world and how this can be fixed. Expect some “heated” (but civil) dialogue as various approaches are discussed (enhanced regulation vs. increased stimulus) to revive the global economy and as President Obama makes his case for the policies his administration has enacted.

Weekly Economic Calendar

 News and Related Story Links:

• Money Morning Financial-Crisis Investing Series (Part VII):
  Financial Crisis Investing: How to Profit Even if the Current Bull Market Rally is Really a Bear Market Fake.

• The Washington Post:
  A Third Straight Winning Week for Stocks.

• Money Morning News Analysis:
  Lousy Quarter May Mean Prolonged FedEx, U.S. Recovery.

• Money Morning News Analysis:
  GDP Shrinks 6.3% in the Fourth Quarter, First Quarter Expected to be Just as Bleak.

Join the conversation. Click here to jump to comments…

William Patalon III

About the Author

Browse William's articles | View William's research services

Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.

… Read full bio