As Of: August 28, 2001
The Summer Rally That Wasn't
It won't have to be reversed in the fall.
The first half of the year 2001 was peppered with denial that there was going to be a recession. The Federal Reserve was on the job lowering interest rates. Americans were going to receive a tax cut. The stock market was simply suffering from a little slowdown in capital spending. But the consumer was still strong. Housing was strong. The excesses of the tech bubble would be washed away, and the market could continue its upward climb. With cash building on the sidelines after a sharp market drop in early April, stocks were prepared for a traditional summer rally.
The rally never came. After a bounce in May, the market has drifted lower through June, July, and August. The bad news: Investors are feeling frustrated and poorer. The good news: A summer rally could have set the market up for disaster when confronted with third quarter earnings which may be the worst of the year. Perhaps this ugly scenario has been avoided. It isn't too late for a burst of optimism that could still push the indexes up, but it looks as though the markets are prepared to face the pre-announcements in September and the earnings reports in October with more realistic expectations.
As the new reality of an actual recession has unfolded, one of the most dismaying aspects has been its uneven effect. The consumer is still spending and the government doesn't want to even call it a recession yet. Government figures do not reveal the real extent of the turnover in employment, and optimists keep pointing to upticks in data here and there. Why couldn't we just have the recession and get it over? Like a child refusing to take its medicine, the agony is going to be stretched out unnecessarily. At the beginning of this year, I was hoping that 2002 would be the start of something better. Now I am having my doubts. I fear that the impact of a full economic slowdown has yet to be felt.
A less optimistic stock market will push money from weak hands into strong hands, and the beginnings of a base may then be formed. But the market will not be able to engage in a sustained upward move until earnings improve. It appears that we have more excesses to work off and more debt to liquidate before the economy can really get back on track. It is ironic that most people who were rewarded for the "buy and hold" strategy over the past decade are now frozen in their tracks and giving back years worth of profits. I foresee that we are in a traders market for at least the next six months, and probably longer. Rewards are going to short sellers, hedge funds, and short-swing traders. If you want to pursue the "buy and hold" strategy now, you need to be sitting on a lot of cash, be selectively dollar cost averaging into quality companies, and have a long time horizon. Unfortunately a lot of "buy and hold" investors are still holding stocks at $15 that they bought at $100. One might argue that the time for bold decision making is past, but it is never too late. For those who are still frozen in the headlights of wishful thinking, it is time for a new plan.