Tuesday, May 5, 2009

Economy Brightens

News here and there of a brightening economy has me feeling more confident of my mid-March bottom call. But now it's time to reconcile the hope with the reality.

1. The DJIA will reach 10,000 by March of next year, a 53% rise from its low in March of 2009. This is great news to anyone who has decided to join the market since its slide, and is good news to anyone who has watched his or her portfolio decline from the high of 14000. However, that will STILL BE 28% LESS THAN THE MARKET HIGH. And I believe the market will creep slowly up (less than 3%) for several years after that.

2. Why do I say these things? Here's why. The market decline from 14000 to 6500 was an over-reaction. There are tons of great businesses whose stock price has been dragged down by the weight of the market....whose fundamentals remain strong. The rally we've seen over the past two months has been sustained by these businesses, and it will continue until those businesses have recaptured an appropriate amount of their lost value. Financials will not soon return to their place of favor in the market, and it is their necessary and proportionate fall from grace that will comprise the lion's share of the difference between the market high and the reset equilibrium in the 10,000 range.

3. Our economy will begin to grow after the turn of the new year. But its growth will be dominated by only three of the four historic engines of American economic growth. Government spending will indeed contribute, and the President's stimulus plan was at least in SOME WAY created to serve this purpose. Consumer spending will increase, but not as fast as in other recoveries as we'll see later. Business spending will increase, as orders resume and appropriate inventory levels are reached. What will give the recovery a haircut (as opposed to previous recoveries) is the housing market (this idea first proposed to me in a phone call with Goldwater's Ghost). This economy will not be able to rely on a full-throated housing rally to help bring it out. Housing will recover even more slowly than the general economy, and without new houses to fill, people will not buy stuff to put in them. This will dampen consumer spending (again, as compared to previous recoveries). Only when housing inventory has whittled down will the stage be set for anything above minimal growth, and I don't see that for several (5) years.

That's how I see it, anyway.

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