Apr 10 2009
Is the Stock Market on a Dead Cat Bounce?
There is an old question, “If you drop a cat from the roof of a house, will it bounce?” The answer then is, “It’ll bounce, but it’ll still be dead.” Is the stock market on a “dead cat bounce?” Is this a long term, sustainable rally? Or is this the beginning of a recovery?
There are two schools of thought about this. One is from Sean Broderick, a writer for MoneyandMarkets.com, who believes that there is too much bad news for the markets to sustain any kind of long term rally. He cites all kinds of statistics on foreclosures and other government data to back up his assertations. The only bright spot, he says, is in natural resources, and he cites the fact that China has begun to import more copper as a sign that the world is going to demand more resouces, even in hard times.
At the other side of the debate is Larry Edelson, an especially prescient financial guru who says that the Dow will climb to over 10,000 within the next six months. Is this a sustainable bounce or is it a dead cat bounce? To him it doesn’t matter as much as long as people hold gold in their portfolios. He points to the oncoming inflation that will occur as govenments will have to prop up their currencies after all the debt they have incurred from pumping up the financial sector.
The best way to determine how the future will be is to look around you. What are people doing in the marketplace? Your section of the country will be different from mine, but in the Midwest, people are voting to spend money just a little bit more than they did last fall. Let’s look at some examples:
Two Sundays ago, when I went to Home Depot to pick up some items for fixing something at my commercial building, a nearby restaurant that had been seriously dead just several months before was jammed with people- at 2 p.m! Most folks go out to eat at noon, so I wondered what their noon crowd had been like. This is in a city of about five thousand people,but it serves a more populated area.
Massage therapist and the like are telling me that their business has gone up significantly in the past month as people are finally seeing an end to the cold weather and are getting out more. Hairstylists are busy again, and so are other service professionals. Contractors are still complaining that it is dead, but there are jobs slowly coming in, especially for companies that renovate older homes to make them more energy efficient.
Why is all of this happening? One reason is because savings accounts are filling for those people who have jobs. The extra financial padding must be enough that the average working Joe is feeling comfortable enough to treat himself once in a while. The other reason, some folks who have been laid off have found jobs in other industries, and they are spending again.
It’s hard to be optimistic in an economy where more and more people are losing their jobs. Since many unemployed have fallen off of the unemployment roster because their benefits have run out, some financial gurus are predicting that the real rate of joblessness is over 18%. Other local people following the real estate market have pointed out that foreclosures have not been occurring because of the government bailout plan, and once that is all settled, houses will go on the market in droves. All of that bad news should be taken into account.
But people are still getting out and spending money, and in the long run, that is what will turn around this economy. If you think about it, it makes sense. Haircuts still have to happen, Moms still get a special day at a restaurant on Mother’s day, cars still have to be maintained. Money will need to spent no matter what.
So the answer to the dead cat bounce is maybe. No one knows if this is a sustainable bounce because a lot of it depends on the price of oil. If that goes over $100 a barrel again, people will cut back and the economy will suffer. In the short term, however, enjoy the ride back up.
