Why Stock Market Rallies Aren't Worth the Hype

First, the good news: Stocks staged a mammoth rally yesterday. The Dow managed a 2.5% run, while the broader S&P 500 scooted ahead 3%.

What a wondrous achievement this must have seemed like…to anyone who spent the previous month on the golf course, far away from their computer screen.

“The recovery is humming along nicely,” our casual observer might have muttered, before heading back out for another few rounds on whatever distant, disconnected island his golfing retreat is located.

Taken in isolation, this would seem like fantastic news. Of course, in the grander scheme of things, there are much larger, far more alarming trends afoot. For while our once-a-month, casual market observer caught a glimpse of a seemingly robust economic recovery, the broader picture is not quite so cheerful.

If one cares to stand back from the screen a little, allowing up to one month of print to enter their peripheral view, the picture becomes more than a tad gloomier. An unrelenting tide of sub-terrible economic reports dampened every corner of the “recovery” landscape during the month of August. In the four weeks leading up to that haloed first day in September, the Dow shed over 4%. The S&P 500 lost more than 4.5% and, previous to yesterday’s rally, was down almost 6% year-to-date. In short, it was the bloodiest August for equities since 2001.

What happened to the “Recovery Summer,” workers and non-workers alike want to know. We all remember when Vice President Joe Biden, like an idiot savant minus the savant, predicted the economy would begin adding 250,000 to 500,000 new jobs a month in the near future. This is the same fellow who urged America to pass a $787 billion dollar stimulus program – later upwardly revised to $864 billion – or suffer unemployment rising above 8%.

As too-many Americans know all-too-well, unemployment remains at stubbornly high levels. First time jobless claims began creeping north once again last month. Finally they edged over the half a million mark in the third week of August, a threshold David Rosenberg, chief economist at Gluskin Sheff, says can only be breeched for a few consecutive weeks before the risk of a second recession rises materially.

Like a masking agent, the Fed’s stimulus programs had, until recently, hidden the most incriminating symptoms of the non-recovery. But now the effect is wearing off. The latest housing data from Case-Shiller, out yesterday, showed positive year over year growth of 4.2%, but the month over month change showed signs of slowing. Why the slowdown? The Fed’s bribes – in the form of $8,000 homebuyer’s tax credits – ran out, that’s why.

As recently as July, President Obama declared the economy had begun “growing at a good clip.” What was really growing at a “good clip” was government intervention, at the expense of healthy economic growth. In Columbus, Ohio, there to commemorate the 10,000th project launch under the Recovery Act, Obama declared, “We knew that if we failed to act, things were only going to get much worse.”

In the coming months, as the stimulus begins wearing off, the nation will find out what will happen precisely because they did act.

That’s not to say there won’t be individual opportunities for investors along the way, of course. It just means we’ll have to look a little harder to find them.

Joel Bowman
for The Daily Reckoning