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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

October 16, 2009 at 8:05 AM

Economy’s fundamentals can’t support this market rally

Top of the News: The Dow crossed 10,000 this week, but this morning it’s fallen back. Not a bad thing. This rally has come too fast. It’s too detatched from the real economy.

Disappointing results at Bank of America and in GE’s financial division show that the damage even within the banking sector remains broad and deep. Yes, some winners have broken out, but these tended to be the better run outfits anyway (JPMorgan Chase, Goldman Sachs). Commercial real estate is a huge potential problem. Credit-card defaults are in the red zone. Much of the credit market remains frozen. And even at the strongest institutions, loan losses are still rising.

And that’s just the banking sector. Weakness otherwise remains widespread, dampened by debt, low consumer demand, poor conditions globally and the inability of many small- and medium-sized companies to get credit.

We’re taught that the stock market is a leading indicator, that it anticipates the shape of the economy for good or ill. I don’t buy it anymore. For one thing, there’s too much information available about the economy as a whole for the stock market to have special prophetic power. Second, it’s driven more and more by manias, technical factors and complex global capital flows that are about making short-term profits and getting out.

Too bad for you folks stuck at the casino with your 401(k)s.

And consider the market’s record of late: It was cruising along nicely as the worst recession since the Great Depression was coming across the horizon. When the bottom fell out, it was, as an author of a book on market bubbles wrote, “devil take the hindmost.” That group tended to be the average investors who lost 40-50 percent of the value of their portfolios.

Now the market has risen again but economists across the spectrum see only weak growth for the next year or two. And this is the “growth” that usually has little to do with you or me. It may take years to repair the damage to the job market; the same is true for housing values. So where is the real economic expansion that will support these stock prices? Maybe it’s not a sucker’s rally, but it’s not backed by the fundamentals.

Today’s Econ Haiku:

Disinflation’s grinch

Took Grandma’s COLA increase

Pop goes her spending

Comments | More in Stock market

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