Two Days Do Not Make A Trend

(October 14, 2002)After the stock market suffered through a miserable September and a weak start in October, the market finally had back-to-back strong days this past week. On Thursday, October 10 and Friday, October 11 the S&P 500 was 7.5% combined for both days. We have been consistent in our belief that the economic fundamentals were not as bad as the stock market’s performance. We would like to believe that the stock market finally realized that things were not so bad and began to rally and price-in a little good news for a change. However, as the markets finally started to rally, the economic news is beginning to slow.

Consumer sentiment and business spending both continue to weaken. These key measures had begun strengthening earlier in the year and then started to weaken throughout the summer. What we had hoped was a seasonal slide could become a more sustained decline if the pullback in these measures continues through the fourth quarter. As usual, the consumer, remains strong in their ability to spend, but even they may eventually take notice of this extended slowdown for business and start to rein in their consumption. If the consumer were to decide to have a modest holiday before business spending picks up, then the economic contraction could begin to be real.

The good news is that the stock markets seem to have priced-in most of the bad news. Given the recent sell-off in September, the stock market seems to have factored in a war, economic slowdown and continued bad earnings news. This is why any modestly positive news (a couple of earnings surprises to the upside on Wednesday night) helps to spring a two-day, 7.5% rally in the stock markets. Although, we think this battle between the economy and the stock markets is far from over based on a few good days of performance. There will be many periods of uneven economic and market performance as we try to rebuild what the bear market has leveled. Yet, it is starting to look like the risk versus reward is beginning to favor being in the market instead of being out of the market.