As I write this, the major U.S. stock markets have finished the third quarter of 2009 with a positive showing. The Dow, S&P 500 and NASDAQ indexes were all up 15 percent in the last three-month period. This was one of the strongest showings for a quarter in the past 10 years.
Is all this optimism warranted? Perhaps, but the economic recovery is still on shaky legs. The major obstacles to a solid and long-lasting expansion are jobs and consumer spending. The pace of new jobless claims is slowing, but corporations are not yet adding many new jobs. These companies are learning how to do more with fewer people, and that efficiency is flowing to the bottom line. Corporate profits are up, which is allowing investors to feel more confident about buying shares in those companies.
So, where do we go from here? Well, possibly higher. This is the beginning of earnings season, where publicly traded companies report their results. Strong numbers could mean an extension to the rally in the equity markets. And there is certainly a lot of money sitting on the sidelines looking for investment opportunities. This cash piled up as investors fled the falling markets in the winter of 2008 and the first quarter of 2009. Now, many investors — both large and small — are acting more risk-tolerant and are weary of earning just 1 percent in a money-market fund. In addition, professional money managers who were too conservative in this latest rally are now under-performing the market. Look for these pros to buy stocks on any pullback in order to finish the year strong for their investors.
What could go wrong? Some economists will argue that this nascent recovery is poised to weaken, especially without the creation of new jobs. This will mean less consumer spending, a further contraction and more pain. The end result could be a classic double-dip recession.
Certainly, no one wants that to occur on top of what we have endured thus far.
— Bill Masho is the broker/owner of Masho Associates. He can be reached at 805.895.4362.