Just seven months ago this bear market bottomed out at under 6,500 on the Dow and many investors were at the breaking point. Some thought the markets would never recoup and most, regardless of how risk-averse they had become, would have gladly bet most of their money that the Dow wouldn’t be back over 10,000 by October.
I spent most of my time telling clients that things would get better and the world was not coming to an end. Only seven short months later, the Dow has rallied more than 55 percent percent and my job has changed.
Now I feel compelled to tell you that rough times still lay ahead.
It is important to know that the rally from the bottom of a bear market – any bear market – is psychologically based and has little to do with fundamentals. The intrinsic value of the equity markets was never as poor as the market price indicated at 6,500 on the Dow.
There is a big gap that needs to be filled just to get back to fair market value and that move has nothing to do with fundamentals and everything to do with investors’ feelings.
We should feel good about this current rally, but that doesn’t mean we are out of the woods yet just because the market deserves to be priced higher.
Jobless numbers a concern
One of the main reasons we feel good is that we have seen a turnaround in profit margins for many of our bellwether companies. Many of the companies that received assistance from the general public through TARP and other programs are showing significant turnaround.
But that turnaround is not as much about increased business as it is about a decrease in expenses. Some of the biggest savings have come at the expense of jobs.
A great way to cut costs is to cut jobs, but the economic rebound won’t catch traction until companies hire again and our unemployment numbers start to decline.
That is one reason even a “free enterprise” advocate like me has such a hard time reading that some of the companies that we just finished saving are now paying out huge bonuses to their top employees for turning around things.
Call me crazy, but I don’t think big – and I mean big – bonuses are earned for firing good, long-time employees and calling loans on small businesses. Bonuses should be earned for creating long-term wealth, not for slashing expenses.
In my opinion, if a business has enough money to pay out billions of dollars in bonuses then it should consider using that money to create long-term value that will benefit the re-valuation of this economy. It is simply unhealthy to do otherwise.
Building and creating wealth is what will get this economy back on track and the sooner the private sector begins to focus on that and not on how much money they can suck out of a stumbling economy the better off we will be.
The good news is that we deserve to see the Dow rise to over 10,000 and it makes us all feel a little better about the American Dream. But we are still a long way from solid ground.
Don’t be surprised to see the Dow dip back down before we head for 11,000. And remember, we haven’t earned this rebound in the market. It is simply regaining ground we should have never lost.
At some point, this market will have to start earning its way up again, but the current economy is not at that earning point just yet.
Scott Reed, CIMA®, AIFA® CEO of Hardy Reed Capital Advisors Tupelo, MS.