Macroeconomically, I don't think we've begun to deal with the reality of the recession that we're entering into. Having the economy shed 250,000 jobs in the first quarter of this year is 1/10th the job losses of the 2001 recession. If you also look at this chart here:
The earnings curves on that graph tend to be fairly smooth, and you don't see sudden plateaus or whipsaws like you do in stock charts. The earnings growth or decline tends to be pretty similar to the earnings growth or decline the previous quarter. The best that we can hope for is that the earnings decline starts to decelerate this quarter, but its still going to be heavily down.
It seems like the stock market has also stopped discounting the future. I think you can see that in the run up to the '07 highs as each intermediate market motion started getting faster and more violent, and while the housing market topped in '06 the markets didn't get a whiff of this until '07 and they've largely been going into a panic over the financial crisis. Now that the fed lent support to the markets over BSC imploding, the markets have some faith that the entire global financial economy isn't going to go down and we're not going to all go back to living in caves in some kind of post-apocalyptic future without any money or finance. The recent rally seems to all be about the financial crisis working itself out and capitalism on the whole not going down in flames. Yay. Now we need to deal with the recession though.
And if you look at the price action of the markets it has been bizzare for a bull run. All these 300 to 400 point up days on the dow, folllowed by brutal corrections or what we've got for the past week which has been completely sideways and flat. Where are the big follow-through short-covering rallys that feed on themselves? If we really were primed for a bull-run I'd expect a lot more fireworks immediately after one of those 300 to 400 point days.
Thoughts?