The economy and the stock market: Is the glass half-full or half-empty?

17 04 2008

The economy and the stock market: Is the glass half-full or half-empty?

Posted by: in Money News

Filed under: Market matters, Economic data, Presidential elections, Headline news, Federal Reserve, Recession

With economic reports and earnings numbers being released this week, we’ve been on a financial roller coaster. With regard to earnings numbers, we had General Electric disappoint, but IBM beat expectations and gave positive guidance for the future. Inflation numbers are high, but core inflation seems to be under control. The economy continues to deteriorate but does not seem to be falling off the cliff. How does an investor interpret all this? Is the glass half-full or half-empty?

The economy is clearly experiencing pain from the credit crisis. Even if we’re not in a recession, it sure feels like one to the average person. Pessimism is the watchword of the day.

However, the huge question is how much of this is already discounted by the equity market? I believe that the answer is that much of this is already built into market expectations. Unless we have another run on a major financial institution, the economy goes into freefall, or major oil supply disruption occurs, the market is already discounting most of the negative information.

In addition, we are approaching the November election. With a Republican in the White Home and Democrats in control of Congress, no one wants to be blamed for a bad market or economy. The Fed is injecting a large amount of liquidity into the system, and the tax rebates should be arriving shortly.

Does this mean a rally will arrive soon? It is a possibility. However, remember that the credit problems still remain. Any solutions will only be addressed after the election. The key variable is the rise in oil prices which is driving inflation. In the short term, it acts as a tax on the consumer and limits the Fed’s options. As long as oil prices continue to rise, any rallies are likely to be muted and short-term in nature.

Doug Roberts is the Founder and Chief Investment Strategist for ChannelCapitalResearch.com and the author of Follow the Fed to Investment Success: The Effortless Strategy for Beating Wall Street. He previously held executive positions at Morgan Stanley Group and Sanford C. Bernstein & Co.