Bailout, Government Action, Hot News, News, Trends, Wall Street

The Big Question: Bull Market or Bear Market Rally???

This week may tell us a lot about the longer term direction of the stock markets. The Dow has risen by 21% since March 9. That’s important because people who are more officially prognosticators than your humble blogger say that when a rise exceeds 20% it’s not just a rally it’s a true bull market. But, as was pointed out on CNN Money, the market would have to go another 14% up just to hit the 2009 high it hit on January 2.

The commentator on CNN felt that there is not much to cheer for and that there is not yet a real justification for a bull market. It does appear that we are past the real fear of a collapse of our financial institutions, and that profitability is returning along with the big government bailout. Everyone agrees we could not recover until things turn around for the banks. However, across the board profits are way down in many companies, and forecasts also are very bad indeed. It’s nowhere near over for the auto companies, for example.

But while the commentator (Edward Hadas) suggested that there is too much bad news for this rally to continue much longer, I think maybe he underestimates the power of optimism and expectations. At least that’s what they taught us at Wharton. Just a month or two ago, too many folks in the know were predicting the possibility of a 3-5 year downturn, some even using the “D” word (if you don’t know ask your parents or grandparents). Now most, including Fed Chair Bernanke, are saying the economy will turn next year. Wall Street typically turns before the economy.

Will we shoot through the roof in the next few months? Probably not. Could we start a slow but steady upward trend, maybe with a few bad days or weeks along the way? Why not. It is very possible the bad news yet to come is already built into Wall Street’s thinking. Yes, many companies are trading right now at 20 times earnings, which probably does not make sense right now. But the Atlantic Ocean moved a few inches to the right as the entire nation breathed a rather big sigh of relief that the sky is not, in fact, falling. Maybe that alone is enough to keep this thing going.