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Jon Talton

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

January 11, 2010 at 10:10 AM

Can the stock market sustain its rally into 2010?

Top of the News: As we head into earnings season, the stock market gains of 2009 are undeniable. But can they continue?

As regular Sound Economy readers know, much of the rally was fueled by the carry trade, with big investors using zero interest rates and cheap dollars to leverage equities. A cute, creative move and very risky. It won’t last forever.

And the stock market is more disconnected from the real economy than ever, as the rally has happened despite dismal fundamentals and no sign that it is a leading indicator. Joblessness, foreclosures and bankruptcies can’t be kept out of the Wall Street equation forever.

In any event, for the year the biggest winners were REITs, high-yield bonds and emerging market stocks. U.S. stocks gained 28 percent but are still down more than 5 percent over 3 years and flat for the decade.

In the Capital Spectator, veteran financial journalist James Picerno asks if the easy gains are behind us. “…The rebound in assets last year is almost certainly elevating expectations that can’t be sustained.” Bonds likely won’t do as well, for one thing. And can the market create an environment that’s self-sustaining. His verdict: It’ll be a close call.

The Back Story: Want more reason to be mad at the bankers? U.S. banks have amassed $1.2 trillion in cash, according to a Goldman Sachs Global Investment Research paper. Meanwhile, loans are down. A big source of income: fees (from the taxpayers who bailed them out).

Today’s Econ Haiku:

Will earnings bounce back?

Cheap money might make it so

But will it be real?

Comments | More in Banking, Stock market

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