Market Commentary for the week of March 23, 2009

Who leads?
Many of you have had animated discussions about whether or not the economy leads stocks, or whether stocks lead the economy. I subscribe to the latter, particularly in bear markets, where diminishing equity performance drags upon fundamentals and psychology, and at significant bottom junctures at which speculators ride “value” stocks for short-term capital gains. Furthermore, at whichever point the markets do turn around, equities will lead the way before fundamentals resuscitate and catch up to stock performance.

A modest appetite for buying depressed stocks, while certainly not a preindicator of economic recovery, is necessary to create a stabilization which might, later, result in a price mark-up phase.

My readers know that I have referred to the secular coupling of stocks and economics as a “parallel disconnect,” a phenomenon in which it appears as if the two trendlines are moving in unison. We know, however, that their mere synchronicity is not always a direct correlation. Such might be the case today, as stocks decelerate their decline while the economy continues to falter. Not only is the economy showing signs of fatigue, but we who watch it are, as well.

Real or not, perceptions are more valid, and devious, than fundamentals.

U-shape recovery.
Today’s excessive bear market decline requires a mammoth turnaround in corporate balance sheets in order to restore profitability, the engine of growth, to the equities markets. While we have seen several bull-cycle bounces within the current phase, they are neither sufficient nor powerful enough to reverse the decline. Indeed, since time is a major factor in the expression of quantitative solutions, the longer the decline continues, the longer it will take to climb out of the hole. My estimates indicate a possible reversal can occur no sooner than November of this year.

Global baskets are registering the same level of distress. The factors that precipitated this bear market are universal, and not beholden to any borders or culture. Across the asset classes, all capitalizations, it is hard to find a persistent, counter-cyclical, bull trend.

All is not lost, however. The deeper the decline the more meritorious the upside response. Applying quantitative data to a fundamental overview, I find that the recalibration at the bottom will be expansive and inclusive of all sectors, all regions. In other words today’s pain is so pervasive that the breadth of shares declining will be matched by the breadth of shares participating on the upside.

Hold on.
We are dealing with an overhang of expectations, previous owners looking for a bailout, and negative velocity. Its effects resonate upon the rich and poor, alike. Fear breeds more fear. When banks stop lending, when we stop asking, markets grind to a halt. The economy is not in cardiac arrest, it is in critical condition. It will improve. We await those factors (like value speculators, for example) which might jump-start the upward reversal in stocks, hoping, also, to preindicate a reversal in economic stagnation.