Market Rally : Too much too early
This is what I think. The market has bounced “too much too early”. Why this a really bad thing?
- Since we are still deep in the middle of a recession, the market will eventually drop. While this is not a bad thing in itself, the problem is, next time when there are real sings of improvement, the market will not rise as much fast enough. The pundits being burnt once will not trust the market until they see clear signs. This will delay the speed at which we recover. Markets rising can actually help us out of the recession faster. Ironically, markets rising too much too fast can also push us into a recession. (e.g. housing market of 2002-2005 led us into this, and tech bubble of 1999-2000 led us into 2001 recession, not nine-eleven)
- Another problem is, when the market falls again (ETA : Jun-July 2009 IMHO) , it will fall a bit too far because we will again start hearing people say, what if this recession is like what Japan is still witnessing? What if we turn into Japan? Who knows when the recession will end, so it makes no sense to invest now. Read this excellent article why we are still in recession.
- Well, it will be terrible, because we will see real damage being done to the economy. You see, recession creates investing opportunities, but recession like the current one also leave permanent scars to the economy. I don’t know the extent of the damage, but we have already witnessed damage in financial industry. (Banks going belly-up or TARP’ed). Retailers closing down. REIT’s, auto-makers, homebuilders filing for bankruptcy. I feel there are some more companies that can file for bankruptcy. I would speculate atleast one of these: OMX, RT, RT, DIN.
So, my conclusion, its good idea to have lots of cash sitting on sidelines as there will be plenty of opportunity to get back in, and get the same or better bargains we all saw in early March 2009. I think it would be a mistake to think one can ride the same companies up that one was able to when market bottomed in March 2009. For e.g. OMX was at 2.10 on March 9th and is selling for 8.31 today. If it drops back to 2 or 3 by july 2009, it would be a mistake to re-up on OMX and conclude that it will rise back again whenever economy recovers. Its possible that it may not even survive this economic hurricane we are in.
One last point why one of the signs we saw is not really positive but actually negative. We lost a little over 500k jobs only in April. That’s less than what we lost in March, so we are recovering? Hah! Dude, we have already got over 6MIL continuing claims. Its only natural that the rate of job cuts slows down. It only means there are no more jobs that can be laid off. I will be happy when we hear jobs getting created and this 6MIL number actually drops to 5 and 4 MIL level. BTW, in the last recession (2001-2002), at its peak, we had less than 4MIL continuing claims. So we are still in pretty bad shape.
Good news is, we will come out of it and when we do, we will see a market rally like never before!!!