Is It Over?

It’s still too early to say the bear market is dead, but the past few days have been a welcome change. The markets rallied strongly on Wednesday based on two events. The first was the sight of the Rigas family (the family who controlled Adelphia Communications) being led away in handcuffs for corporate malfeasance. The second event occurred later that same day when several leading financial institutions (JP Morgan, Citigroup, etc.) stated that they were solvent, strong and honest. The stock markets rallied throughout the day and finished up about 6% on all major indexes.

We held on to most of those gains on Thursday. The technology stocks did slide on Thursday as a large semiconductor manufacturer cut estimates for capital spending and semiconductor chip demand worldwide. However, by Friday (7/26) many of those same stocks were rallying, as their valuations were deemed attractive by several research firms. We finished the week by not only maintaining Wednesday’s gains but also modestly adding to them.

The impetus for Friday’s positives was due in part to the revision upward of the University of Michigan’s consumer confidence numbers. These numbers for June had initially been negative over May’s numbers, but after further data crunching, the numbers improved slightly today. Consequently, the stock markets took comfort in the thought that the consumer would not abandon either spending or the stock markets totally. Hopefully, after a weekend of rest, more investors will join the party next week.

We remain optimistic but cautious concerning the future direction of the market. As we have stated in the past, the economy and corporate profits are improving. What has been bad has been the investor psychology, which has been consistently battered by negative headlines concerning accounting scandals and ethical misconduct. If the investor psychology improves and all else stays in tact, the stock markets could not only hold the recent gains but also add to them.

All data sources Bloomberg