Nice Rally, but More Pain Ahead

The March stock market rally was welcome, long overdue, and helped erase some of the losses experienced in investment portfolios this past year. Stock markets do not usually move in a straight direction for long. The last two quarters have experienced both bull (20% gains) and bear markets (20% declines) within the same quarter!!! We have pointed out how credit markets are improving, some economic indicators are showing signs of turning, and there are still plenty of values for the long]term investor.

Unfortunately, there are still a few obstacles to overcome before a permanent recovery can take hold. Consumer credit and commercial real estate trends are getting worse, meaning banks will have more charge-offs and loan losses to book. We still do not know the final outcome of the government “stresstesting” of the major banks. We doubt that all of them will pass the test with flying colors. The General Motors and Chrysler situation remains unresolved, though a bankruptcy seems increasingly likely in the next sixty days.

Perhaps the biggest obstacle is the health of corporate earnings reports, which will be announced over the next couple weeks. The forecast is for more steep declines in earnings, and this could lead to some near-term weakness in the stock market. We will be monitoring the results, and soon, perhaps not this quarter but eventually, corporate earnings will also stop falling and begin to improve. Then we can send this bear market into hibernation for good!!!