Boy, what a quarter! If September is the historically the worst month for the stock market, we certainly didn't see it this year. As a matter of fact, the stock market has been derailed from its seasonal tendencies for quite some time. Will this shift in trends mean that the seasonally strong periods for the market now become weak?
We are witnessing some strange shifts in market trends. "Sell in May and go away" hasn't really worked in a while. We had a mild correction in June, but nothing for the bears to really hang their hats on. The summer rally that everyone was waiting on never happened. The stock market did not begin rallying until after traders came back from their summer vacations making the month of September one the best on record.
So, what is causing the stock market to rally?
We are in the midst of a mid-term election, and I am trying to figure out was who doing the window dressing in September. Was it the politicians, or the institutions?
1) During the months of July and August, we were facing huge problems on the energy front. At the end of August, these problems began to disappear. We went from hearing about $100/bbl oil prices to $30/bbl prices in almost a blink of an eye. What gives?
2) The stock market has been rallying as market players concluded that the economy was in for a soft landing. If this is true, then why have interest rates fallen from 5.2% in July to 4.63%. If the economy is truly in for a soft landing, there is no reason for interest rates to fall. If anything, interest rates would stabilize or nudge higher on prospects for a good economy.
The basic rule of thumb for interest rates is pretty simple. If interest rates are rising, we have an inflation problem, if rates are stable, everything is fine, if interest rates are dropping the stock market should be anticipating the economy is going to weaken.
So, if rates are falling, the economy is not fine and corporate profits are going to decline. Here again, given this outlook, the stock market should not be rallying.
3) Lastly, the stock market could be rallying because the market believes that the fed will lower rates. If the fed lowers interest rates it is because the economy is not doing well. If the economy is weak, then corporate profits will also be weak. If corporate profits fall, then again, why are stocks rallying?
September was a very strange month. Stocks and sectors with sub-par or falling earnings were rallying.
The sector with the worst news in recent months was the homebuilding sector. Oddly, the homebuilding stocks rallied more than 10% last month. Does this mean that the problems for the housing sector are over? I don稚 think so.
We still have a lot of problems to deal with after the pre-election utopia is finished. Unless I am way off base, we are witnessing a market mirage that will reveal its true self shortly after Election Day. While the stock market can ignore reality in the short run, eventually it will have to revert back to what痴 happening in the real world.
Here are a few real world reasons;
1) Household debt has soared from $6,966.7 billion in 2000, to $11,840.1 billion as of the first quarter of 2006. This is an increase of about 70%. Much of this debt has been incurred because of the reckless use of home equity lines based on the appreciated values in real estate.
2) Consumer spending has been a result of the cash borrowed from home equity, and increased credit card debt. If, and when housing prices begin to fall, equity lines will dry up which will lead to a drop in consumer spending.
