Stock Market Rally Running Out of Steam

It’s always a little tricky to know exactly what an economic recovery looks like. But it’s usually pretty easy to know what it doesn’t look like…and it doesn’t look anything like the chart below:

Existing Home Sales

An economic recovery doesn’t look anything like this either:

US Unemployment

Not surprisingly, therefore, the euphoric global stock market rally that began early last year is running out of steam. In fact, it’s also running out of coal. As anxieties about the strength of the global economy increase, enthusiasm for equities is decreasing. Thus, the US stock market has entered the “reality check” phase of the post-crisis rally.

After the Dow’s dazzling 77% rally from the lows of March 2009 to the recent high of 11,258 in March 2010, a little “give-back” was to be expected. But a lot of give-back was not expected…at least not by the legions of investors who believed that the Fed had vanquished the credit crisis for good, and had conjured a recovery out of thin air.

So now that this give-back has lasted an uncomfortably long period of time – and now that most economic data are coming in “weaker than expected,” the Dow’s nifty rally off the March 2009 lows begins to feel more like a deception than a validation.

Economic growth here in the US is clearly decelerating, as evidenced by a wide range of economic data. Yesterday’s disastrous existing home sales report was just the latest example.

“Sales of existing houses plunged by a record 27 percent in July as the effects of a government tax credit waned,” Bloomberg News reported, “showing a lack of jobs threatens to undermine the US economic recovery…Demand for single-family houses dropped to a 15-year low and the number of homes on the market swelled… The months’ supply of single-family homes at 11.9 months was the highest since 1983, the NAR said.”

“We may not have said it first,” we declared in the June 30 edition of The Daily Reckoning, “but we have said it repeatedly: The US economic recovery is a myth…a fairy tale.”

Three months earlier, in the March 2 edition, we observed, “The non-recovery seems to be gathering momentum. Almost every day we receive fresh evidence of economic non-growth and non-vitality. The US economy that still lacks essential qualities like jobs, corporate revenue growth and credit. The visible effects of this widespread malaise are…well…widespread.”

Back in early March, however, most professional economic observer-prophets were still crowing about the end of the credit crisis and the resumption of economic growth. Today, the observe-prophets are trying to shake the fog out of their crystal balls. There is no recovery. Merely less catastrophe.

“We are still in the early stages of what is to be a long period of restructuring and re-adjustment – a Great Correction,” Bill Bonner observed a few months ago. “So far, the private sector has begun paying down and destroying debt. And the public sector has begun to increase its debt and destroy its own credit. Falling prices tell us that the private sector de-leveraging is continuing.”

Eric Fry
for The Daily Reckoning