Perception is reality! Or is it “perception becomes reality?” It doesn’t really matter. My point here is that once investor confidence returns, the market bottoms and begins to claw its way back. The Conference Board released its consumer confidence report on April 28, and it showed an unexpected spike to 39.2 percent for the month of April, up from 26.0 percent in March. The Reuters/University of Michigan final index of consumer sentiment for April came out on May 1 and reflected the biggest gain in more than two years. It rose to 65.1, versus 57.3 in March. (In November 2008, the index had reached its lowest level in three decades of 55.3.)
While most of the recent economic data has been mixed, some slightly better-than-expected or not-quite-as-bad-as-they-could-have-been reports have fueled a stock market rally. April was one of the best months in nearly a decade for the market, as the S&P 500 was up more than 9 percent, the Dow Jones Industrial Average rose 7.4 percent and the Russell 2000 surged 15 percent. The S&P has rallied more than 30 percent since March and is now slightly positive for the year.
In my opinion, there really hasn’t been any great news, but this rally is forecasting better news to come. We know that the stock market is a leading indicator, and the market is telling us that “the good news is that the bad news is behind us.” Imagine what will happen when positive news does start to show up, and there is still big money on the sidelines…waiting for confirmation that the bottom is truly in.
Many investors don’t believe in trying to pick bottoms in the market; they have been waiting for the market to correct and pull back so that they can get in at a lower price. The market has seen its second straight month of gains, and they are still waiting. The market has made it through the first-quarter earning season without a major sell-off. The market has made it through another Federal Open Market Committee meeting without a major sell-off. The first quarter GDP report was down 6.1 percent, and still no major sell-off.
Will the Stock Market Correct?
So now the question is: will the market correct and pull back? Yes, I believe that it should and that’s good for the market. It will test the strength and conviction of the investors, and see if new money is finally willing to step up and buy stocks. I’m confident that the bottom is in, and that the rally will continue through the remainder of this year. However, I am not recommending that you buy stocks at these current levels. The market has gotten ahead of itself right now.
If we see banks really begin to loosen credit, and housing and employment data show improved numbers later in the year, then we will likely see the DJIA at 10,000 and the S&P at 1,000. I think this rally is the real deal.
That said, there is a wildcard in the deck that could show up soon: commercial real estate. This could very well be the next problem for banks, and the launch pad for another sell-off in stocks. I don’t believe that the market will see new lows, but a correction of 7 – 10 percent is in order. Residential real estate is starting to show signs of improvement, as evidenced by reports earlier this week. The March Pending Home Sales Index showed an increase of 3.2 percent, and March Construction Spending rose 0.3 percent. Both reports were better-than-expected, and that’s why I don’t think the next sell-off will be anything more than a meaningful correction. It will be another buying opportunity.
Please feel free to contact me with any questions you have in this or other markets, and to develop a customized strategy for your particular situation.
Frank J. Cholly is a Senior Market Strategist with Lind Plus. He can be reached at 866-231-7811 or via email at fcholly@lind-waldock.com.
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