Suckers Rally?

From BFFFFA, Goldwater's Ghost asks:

"The DOW average is up over 9,000; a 44% increase from its 6,600 mark set six months ago. To what would you attribute this mini bull rally to:

• the mood of the market that the worst of the financial meltdown is over, and that the economy has “turned a corner”
• better-than-expected corporate earnings in some sectors
• it’s a suckers rally
• it was under-valued six months ago
• because The One said it to be so

Or is it something else?"

I think the rally is attributable to a couple of factors.

• The market was ridiculously over-valued at 14000, propped up by a financials sector that whose value was smoke and mirrors. The market was ridiculously undervalued at 6400, with the meltdown in financials causing a lack of confidence every where else. Good, solid companies were dragged down in value without any rational reason. 10000 is "the new normal" and what we see now is a correction to the correction.
• The actions of the late Bush and early Obama Administrations to ungum the credit/liquidity markets will be shown when all is said and done to be the only things government did that actually had a demonstrable impact on this recession ending. To suggest that the "stimulus" had anything to do with this rally is unsupportable. Strike that--I do think there is and was a psychological value to some investors in seeing that the President was all over this, albeit in a feckless, irresponsible, and ultimately unnecessary manner.

GG and I got into this last Spring when I told him something to the effect that "when economists go back and evaluate this recession, it will be shown to have ended in June or July of 2009". He was less sanguine, thinking it might be a sucker's rally. I was pretty sure the rally was derived of the conditions above, matched with a good deal of cash sitting on the sidelines waiting to get in the game.

But he and I also discussed (and we've done so here on this blog) "The New Normal", and ladies and gentlemen, a Dow at 10K is about all you're gonna get for three-five years. We hit the "reset" switch, and our economy is simply a different one than it was before. Consumer spending isn't going to act as an engine of growth until unemployment decreases--dramatically. Even then, one hopes that America's spending and saving habits will have been altered by this experience (a guy can hope, can't he?). Add to this an almost certain tax increase on virtually everyone (not just the rich), and consumers are simply not going to have the same coin to throw around. Government pump-priming is running its course, and the mood in the country is one of contraction, not expansion. Business is expanding, slowly, with trepidation--as credit markets unglue and strategists re-assess the new landscape.

What is not going to act as an engine of growth is the housing market, a reliable factor in many recoveries. Here's where "the new normal" is going to be most different to those with short memories. Easy credit to buy houses is a thing of the past--so working through the glut of inventory out there on the real estate market is going to be a slow and painful process. People buy things to put in their new houses, so since folks won't be as mobile, they'll not be spending as much (another argument for detaching health insurance from employment--people would be more willing to move and switch jobs if they didn't have to worry about losing insurance--could act as a pump primer for the real estate market).

What I'm saying is that while I predicted a Dow at 10,200 on 31 December 2009 in my Predictions post, I did not develop that further. I've done that here today--get ready for a few years of hunkering down, l0w-slow growth, and having to be a lot smarter about one's investments than they were in the first decade of this century. The internet caused a boom; complex financial instruments led to another. We won't move off the low/slow growth curve until we've worked through the housing issue, and then growth will be more moderate and predictable--until the next great thing (likely in my opinion to be a breakthrough in energy technology) occurs.