Wednesday, April 14, 2010

Bernanke Goes to Washington

The DOW surpassed 11,000, for the first time since June of 2001. If nothing else, the benchmark boosts investor sentiment. So what does this mean? The market is soaring, and up more than 60% since March of 2009. That is a remarkable showing of market strength. We may well see the DOW vacillate below 11,000 and flirt with the benchmark a while before we can expect to settle in. It is important to note that the market is merely 6 percent below the all time high set in 2000, before the DotCom bubble burst.

According to recent polls, most Americans still believe the economy is in worse shape than a year ago. The financial markets seem to tell a different story. On the surface, the market milestone is an indication that the recession will soon be referred to in past tense. This theory could be further supported by consumers spending surge in the past 5 months. Not so fast….. there are too many other facets of the economy to be considered before we falsely assert “Mission accomplished!”. Let this be a glimpse of how complex interpreting the status of our economy can be. Perhaps we can better appreciate the Chairman's dilemma. When the economy is in better shape, economists, traders and analysts are pretty good as reading the tea leaves and advising on where the trend is heading. The events of the last 24 months have been pretty drastic, yeilding an unusual set of circumstance. The turn of events has has left scores of experts scratching their heads as to what happened, how it happened, and how to fix it.

The Federal Reserve Chairman will go to Capital Hill on Wednesday to give his perspective on the state of the economy. It’s a “good news, bad news” message he’s expected to deliver. Yes, the economy is recovering, but No, it won’t be completely turned around anytime soon. Bernanke will warn Capital Hill that the economy will continue to recover at a sluggish pace.

Therefore, in spite of the DOW industrial average closing above 11,000, and consumer spending increasing for 5 straight months, the lagging economic factors (housing values, unemployment, tight credit)will unfortunately impede the process. The 3rd quarter of 2009 was the turning point for the economy, following four straight quarters of grave losses. In contrast, the 1st quarter of this year showed promise, as job creation for the month of March tipped the scale at 162,000.

Bernanke faces the daunting, but delicate task of ensuring that the economy stays on track amid fading stimulus programs. So, my fellow Americans, there will be no celebrating for quite some time, since unemployment is still regretably 9.7 percent nationwide. According to economists, unemployment is expected to remain high for another 3-4 years before we see 6 percent or less. So why is the market seemingly on fire. Is this a bubble that will correct itself in the months to come – or perhaps later? It just doesn’t add up from where I'm sitting. The market is pumped up, and effectively doing its job to build investor confidence, and sending the global message that the U.S. is "Back". Nevertheless, I somehow feel the stock market is growing too much faster than the economy.

Unwavering in his perspective, the Federal Reserve Chairman‘s concerns are the high unemployment, weak housing values, stagnant wages, tight credit, and the second wind of foreclosures. This is an election year, thus the state of the economy will likely be the focus of many campaigns - you can just imagine how the Republicans will spin the slow churning recovery.

K. Reilly
Cohn-Reilly Report

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