Are you surprised? The rally still hasn't lost steam
The eight-month-old rally still hasn’t lost steam, even as unemployment hits a fresh high and skeptics keep calling for a vast sell-off.
Whenever stocks start losing ground and the run-up looks like it may come to an end, investors step in and use the dips as buying opportunities, which LA Times’ Money & Co blogger Tom Petruno describes as a classic bull-market mentality. “You don’t sell the dips, you buy them,” he says.
Still, there’s one other factor that keeps pushing the market higher: fear. Portfolio managers are scared about reducing equity exposure for the fear that this rally will keep going and leave them behind, he says.
“After the horrors of 2008, a money manager who doesn’t keep up with the market’s comeback this year is facing his or her greatest risk of all: the risk of unemployment,” Petruno says.
The Dow’s up more than 60% off the early-March lows, yet still remains about 36% off the all-time high set in Oct. 2007.
From Petruno:
A fund manager who is lagging will have to face the wrath of aggravated clients for a second year in a row.
“This market is a nightmare for under-invested portfolio managers,” says Jeff Saut, chief investment strategist at brokerage Raymond James & Associates. That, he says, explains why it doesn’t take much of decline in share prices to pull in buyers: Managers with cash really do see any dip as a gift.
A bigger sell-off is out there, somewhere. But Saut doesn’t see it coming soon.
His message to clients, he said, is: “You can get cautious, but don’t get bearish.”
Still, the stock market continues to ignore the labor market and many of the dire fundamentals still plaguing the economy. All it cares about is the fact that the financial system is no longer on the verge of collapsing, like it was this time last year. And as long as the economy keeps showing signs of improvement, even if those signs are largely driven by low interest rates and government spending, stocks may keep rising.
But just as the stock market keeps hitting new highs, the unemployment rate remains on the rise, hitting a 26-year high of 10.2% last month. Call it “the great disconnect between stocks and jobs,” former labor secretary Robert Reich writes on his blog.
He notes a distressing cycle that’s taking place. Stocks are up because corporate earnings look better. That’s all well and good. But the problem is earnings are mainly improving because of cost-cutting, with companies purging payrolls as the single greatest cost saver.
“So they let people go and, presto, their balance sheets look better and their stock prices rise,” Reich says. “The Fed and the Treasury have, in effect, placed a huge bet on a recovery driven by asset prices. That’s a bad bet.”
The economy can’t recover without consumers, yet mounting job losses and pay cuts will continue hurting consumption. “Where is this heading? No place good,” Reich says.
