Confidence driving Stock Market

Since 10 March (Tuesday last week), the Dow Jones Industrial Average (Dow) rose for five sessions out of six. Dow rose a spectacular 12.9% over that period.

 

Date             Dow   Change (%)

9 March        6547  

10 March      6926   + 5.8

11 March      6930   + 0.05

12 March      7170   + 3.5

13 March      7223   + 0.7

14 March      7216   – 0.09

15 March      7395   + 2.5

 

What happened?

 

There were a series of statements and news that lifted the sentiments of the investors.

 

On 9 March night, CEO of Citigroup Vikram S. Pandit sent a memorandum to his colleagues stating that Citigroup was “profitable through the first two months of 2009 and are having their best quarter-to-date performance since the third quarter of 2007.”

 

Two days later on Wednesday, Jamie Dimon, CEO of JPMorgan Chase, said that the bank was profitable in January and February.

 

Similarly, Chief Executive Kenneth Lewis of Bank of America Corp (BOA) said on Thursday that BOA had been profitable in January and February and should be able to ride out the recession without new help from US taxpayers.

 

On the same day, General Motors issued a statement that it had withdrawn a request for an additional US$2 billion that it thought was needed from the US government to stay alive through the end of March because it was making more progress than expected in reducing costs.

 

The Chinese premier Wen Jiabao added a bit of optimism too when he spoke at a news conference on Thursday at the end of the National People’s Congress annual session. In that session, he reported that China’s economy was comparatively healthy and said his government would take whatever steps were needed to end the country’s slump. He predicted that the world economy would improve in 2010. (Source: The New York Times)

To wrap up a week of upbeat news, Federal Reserve Chairman Ben Bernanke said on Sunday during a TV chat with CBS that US should start recovering from recession next year if there is political will to finish the costly rescue of its shattered banking system.

 

All these recent news on major economies and major US companies hurt by the recession provided relief for investors. Investors were constantly reminded about gloomy economic news since last September. The latest news gave a fresh air of optimism. What is in short supply currently is investor confidence. It is confidence that lift sentiment. These latest news were confidence boosters. With that came improved sentiments on the stock markets and lifted the share prices into a decent rally. Is this sustainable?

 

Have we turned the corner definitively? We know that stock markets lead the economies by about six months. Are stock markets saying that economic recovery will come in the last quarter of 2009, so share prices will pick up from now on?

 

I feel that this is wishful thinking. A week of uplifting news and predictions do not change the economic conditions on the ground overnight. There are still fiscal and monetary policies to be implemented by various major economies before we can see sustainability in economic growth. What is positive outcome is that nations around the world acknowledged the devastating effect of the current financial crisis and are actively taking concerted efforts to alleviate this downturn.

 

The rise in stock market is still good news for investors. In the case of equities, what goes down will go up ultimately. What is oversold will be corrected when sentiments of investors improved, provided the company continues to stay afloat. The question is when it is good time to take more risk and buy up more stocks. This is difficult to answer.

 

Written on 3/18/2009 10:45 AM

 

Copyright © 2009, the author known as LKT in Singapore.

 

The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.

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