Published December 8, 2008

Wall St finds silver lining in the darkest hour

Friday's unexpected but impressive rally could bode well for market

By ANDREW MARKS
NEW YORK CORRESPONDENT
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BY ALL accounts, the dreadful economic data heaped on US stock market investors last week was enough to keep their heads spinning and their money under the mattress.

Working the floor: The Dow was up 259 points on Friday for a gain of 3 per cent

Not only did Wall Street receive the official word that the US is in a recession, but it is one so severe that it is already twelve months old. The economic reports that followed over the course of the week only offered further evidence that the end is nowhere in sight.

And yet, at the end of a week that brought unrelenting signs that these are the worst of times in decades for the economy and the financial markets, Wall Street staged an unlikely and impressive rally, and offered some hopes of its own for an improving outlook.

'It's almost baffling, but in these turbulent times, you can't even count on a sell-off,' joked Marc Pado, chief investment strategist at Cantor Fitzgerald. His comment was made soon after Friday's closing bell ended a day in which stocks rebounded more than 6 per cent from their lows in intra-day trading to generate a strong rally despite the Labor Department's stunning job-loss number of more than 500,000 layoffs last month. Some economists now expect the numbers to be repeated when the December employment numbers come out in a month's time.

Preceding that historically bad jobs report during the week was a worst-ever ISM manufacturing report, the worst month for same-store sales in more than three decades, and further proof that the housing market tailspin is accelerating. So with the declaration by GM's chief executive that the employer of nearly 200,000 doesn't have enough cash to survive on its own through to the end of the year, the news couldn't get much more grim.

'On the face of it, investors had every reason to turn even more bearish with all the bad news coming down,' said Mr Pado.

'The fact that stocks finished with such impressive gains despite all that is a very bullish statement,' he said. 'We could point back to this day a few months from now and say that's the point that the market decided the economy couldn't get much worse and investors started lifting their heads towards the horizon.'

Indeed, analysts struggled to pinpoint a reason for the late afternoon rally that lifted the Dow Jones Industrials to a better than 3 per cent gain after it had sunk to losses of more than 3 per cent at around midday.

Financial and insurance giant The Hartford offered a solid earnings outlook for the year, offering some hope that not every company in the financial sector is in dire straits.

There were also early indications that the government's myriad programmes to lower borrowing costs and make loans more available have helped to stabilise and loosen credit markets, driving down rates on mortgage-backed securities and debt issued by Fannie Mae and Freddie Mac to levels not seen since last January.

But yields on Treasury bills also continued to plunge and borrowing costs for companies whose debt isn't backed by the US government have yet to improve, signs that risk-aversion continues to rule.

'More than anything, Friday's trading is a sign that investors looked at the magnitude of bad economic data, and decided to look at it from the perspective that this is as bad as it gets, and maybe stocks have been almost fully discounted for the bottom,' said Joe Battipaglia, investment strategist at Ryan, Beck.

Only time, and further proof of resilience in the face of bad news, can prove that bullish thesis. But on Friday, it looked like a promising one, as the Dow finished the day with a 259.18-point, or 3.1 per cent, advance to close the week at 8,635.42.

The S&P 500 fared even better, with a 30.85 point gain, or 3.7 per cent, to 876.07. The Nasdaq Composite was the day's biggest winner, gaining a robust 63.75 points, or 4.4 per cent, to 1,509.31.

For the week, however, blue chips were 2.2 per cent lower. The S&P 500 lost 2.3 per cent and the Nasdaq 1.7 per cent.

But considering how the week started, with a 700-point crash on Monday, and all the hard-to-swallow news that followed, investment strategists found the stock market's performance encouraging. 'We continue to look like we're in the bottoming process,' said Larry Adams, chief investment strategist at Deutsche Bank.

Stock investors can expect little relief from economic data in the coming week. But they should get a boost from Washington's ongoing efforts to right the failing economy. That will start today when Wall Street comes to work having had two days to absorb the announcement by Democratic Congressional leaders just hours after Friday's closing bell that they will work to put together a short-term rescue for the Big Three US automakers.

The compromise with the White House could also lead to Treasury secretary Henry Paulson requesting the remaining US$350 billion of the financial industry bailout money, now that it looks like he won't have his arm twisted by Congress over using some of that money, to aid GM, Chrysler and Ford.

Additionally, President-elect Barack Obama began offering details over the weekend of the huge government stimulus plan to spur economic recovery that he wants to enact soon after his inauguration on Jan 20.

He said that he will create the largest public works construction programme since the interstate highway system bill more than fifty years ago, as well as technology works programmes that are expected to cost as much as US$700 billion in an effort to put 2.5 million people back to work over the next two years.

Investors will have to balance those hopeful developments against the hard evidence of economic data. Monthly retail sales are due this week, and economists expect further sharp declines.

The producer price index, due on Friday, should also show a significant retreat in wholesale prices, which investors will not cheer with the fear of deflation in the air. Friday also brings the University of Michigan's consumer sentiment index.