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What a great rally that was yesterday.
“Extreme pessimism? Let me introduce you to slightly
improved economic data.”
I believe that pretty much sums up yesterday’s powerful move
higher.
Manufacturing data came in better than expected. Along with
Tuesday’s improved consumer confidence number and good news from emerging
markets, it was enough to offset a disappointing early read on employment
from ADP.
I understand fully that individual investors are highly
skeptical of the stock market right now. But yesterday’s action should show
what the potential of the stock market is, once economic data
improves.
I also think individual investors should set aside some of
their skepticism and start focusing on the positives of the economy rather
than the negatives. I know, I’m probably asking a lot…
It’s myperception
that investors hate everything right now. We hate Congress, we hate the
administration, we hate banks, we hate CEOs, the Fed and anybody else who has
anything to do with the economy or the stock market.
I’d also like to suggest that so much hate isn’t good for
the psyche. And it certainly won’t be good for one’s portfolio as the
U.S. economy slowly improves.
We saw the same dynamic when the stock market rallied off
the March 2009 lows. Individual investors were slow to abandon their bearish
stance and missed some hugely profitable opportunities.
I sympathizewith
the frustrations directed at our political leadership. And I came across a
great article that sums up the situation better than I have. It’s from Pete
Morici, who, last I knew, was an economics professor at the
University of Maryland.
This article comes from TheStreet.com. Give it a read and
let me know what you think: [email protected]
Now, gettingback to
the rally, investors should be aware that yesterday’s move was led by
financials and energy/materials stocks.
This is as it should be, and as I suggested it would be on
Monday. Despite the continued anger at banks and the skepticism surrounding
their financial health, it is the banks that must lead economic growth and a
stock market recovery.
That’s because the U.S.
economy is driven by credit and lending. Even though we know
that banks have been reluctant to lend as they continue to hoard cash to
improve their balance sheets, those balance sheets are improving. And lending
will improve.
In the second quarter, banks reported their best earnings
($21.6 billion) since the third quarter of 2007. Please note, too, that
earnings improvement is being driven by the big banks. Smaller, regional
banks are still suffering. The FDIC’s list of problem banks rose from 775 to
829 in the quarter. And if you pay attention to bank closings, which
typically occur over the weekend, then you know that small banks are still
being closed.
I know that Daily Profit readers might
prefer to invest in regional banks, but that’s simply not the way to make
money right now. Stick with the big banks until the economic rebound gets
stronger.
America‘s
retailers had a better than expected August.
And analysts are already talking about a weak Christmas shopping season. It
seems a little early for that. Especially since savings rates are up.
It’s also a little early for me to start the “never
underestimate the American consumer” refrain, but what the heck.