Published April 4, 2009

Bear market rally or the real McCoy?

Wall Street may be saying something when yesterday's 8.5% jobless number doesn't seem to faze it

By ANDREW MARKS
NEW YORK CORRESPONDENT

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IS the bear market dead? The trading action of the last few days has led several US stock market strategists to make that claim.

'We've hit a real inflection point here, a fundamental turning point in the stock market, marked by a return of investors' appetite for risk,' said Marc Pado, chief investment strategist at Cantor Fitzgerald. That's an amazing statement, considering that investors this week were still concerned about the fragility of the market's bull run.

'There was a strong likelihood that the new quarter could take the wind out of the market's sails and prove this rally to be a short-term bear market bounce,' said John O'donogue, chief equity trader at SG Cowen & Co.

But even news yesterday that non-farm payrolls fell a whopping 663,000 in March and that unemployment reached 8.5 per cent, the highest since 1983, seemed to have hardly fazed investors.

Still, trading is volatile, with the Dow Jones Industrials opening a tad lower yesterday, then rising before dipping so that at 10am, it was down 44 points.

Pointing to the market leadership of consumer discretionary sensitive sectors such as retail (up nearly 50 per cent from November lows) and semiconductors (up more than 30 per cent since January lows) Mr Pado believes the bullish sentiment will survive.

'To be able to hold onto some or most of Thursday's surge in the face of this jobs report will confirm my belief that this rally is far more than just a bear market bounce,' he said, referring to the buying spree that led the Dow Average to a 216-point or 2.8 per cent gain, closing at 7,978, just under the psychologically important 8,000 level.

The S&P 500 jumped 23 points, or 2.9 per cent, to 834, and Nasdaq climbed 51, or 3.3 per cent to 1,602 on Thursday.

The announcement of US$1 trillion in increased funding for the IMF out of the G-20 meeting, relaxed accounting standards for banks valuing their toxic securities and hopes for an economic recovery drove markets higher.

Although the March jobless number came in dauntingly high, it fell below many Wall Street economists' estimates, with the consensuses running about 675,000 losses. One of those economists looking for a higher number was Ethan Harris, chief US economist at Barclays, who said shortly before the report's release that the stock market was likely to react positively to any number south of 700,000.

'It's hard to call 663,000 a small number, but it is low enough to fit into the prevailing sentiment of the moment, which is focused more on the effect recent policy moves will have on the economy in the second and third quarters than in the grim numbers we're seeing right now,' said Mr Harris yesterday.

While Mr Harris, who also expected the unemployment rate to hit 8.6 per cent, is more cautious than other Wall Street economists about the prospects of seeing big improvements by the end of May, he agreed that the jobs number fits into the prevailing market sentiment that unemployment should be treated as a lagging indicator.

'You can argue that the March number is due to employers' panicky delayed reaction to the capital markets' panic reaction in the fall. The thesis then is that the panic phase of jobs losses will fall away now that the panic in the capital markets has stabilised,' he said.

Indeed, economists are pointing to other economic data, such as the new orders component of the recent purchasing managers report, which picked up significantly from a reading of 33 in February to 41 in March, the two-month long rise in consumer spending, and Thursday's improved auto sales numbers, as signs that the worst is over.

Is it over then? Mr Harris preaches patience and cautious optimism. 'We're seeing some encouraging signs, but it's too soon to say 'yes'. The proof will be in the numbers we see in May and June,' he said.