FOR the third straight year, Wall Street is trying to sell you some January optimism.
Investors know how the story ended in 2000 and 2001: early optimism sucked them into the stock market and the result was big losses. Then came the vows never to be fooled again.
So are you being fooled again? Should you believe the happy talk this time?
Nobody wants economic hardships to continue. But there’s a difference between wishing that the bad times would go away and actually seeing improvement.
Here’s what seems to be happening with the economy right now.
There has been some economic improvement, even though Washington is still reporting a rise in the unemployment rate to a 7-year high of 5.8 percent and the loss of 124,000 jobs in December.
And while there seems to be some improvement in the economy’s service sector, the most improvement is coming from the optimism being generated by the financial markets.
More on that in a minute, but follow the bouncing ball here: The financial markets are improving because they perceive an improvement in the economy, and the economy is mostly only reflecting the gains in the financial markets.
It’s like believing that you are pretty because you are telling yourself you are pretty – it proves nothing.
Lakshman Achuthan, managing director of a very influential economics forecasting firm called ECRI, says if nothing goes wrong, the economy may start recovering over the next few months.
But there is “no strong head of steam that says this recovery can’t be derailed.” In fact, Achuthan believes that even if the economy does show improvement in the months ahead, the recovery could be weak and not produce many jobs.
Esteemed economist Henry Kaufman agrees. He recently told the American Finance Association Conference in Atlanta, “Consumers will find it difficult to increase their spending.”
The underlying problem is this: the recession that officially began last March had its foundation in the corporate excesses that began during the Clinton-era stock market bubble. Corporations overspent on nonsensical business ventures, cheered on by Wall Street charlatans who benefited from each buck spent.
The terrorist attacks on Sept. 11 proved to be as temporary an economic distraction as many of us had predicted and hoped. Still, the economy was weak before those attacks and much of the improvement Wall Street is now cheering is probably only a recovery from the terrorist-induced funk America had fallen into.
So, we are back to square one of the recession.
Where does that leave people who are tempted to believe Wall Street this time around – after all, can all those highly-paid analysts be wrong three years in a row?
This year is a harder call. Why?
Mainly because Washington is largely responsible for the bounce back in the stock market. You’ll have to take my word for this. After Sept. 11 the Treasury did what it had to do to save the financial markets. And by doing this, Washington changed the dynamics of investing.
And as much as you think you suffered owning stocks these last two years, share prices are still very, very high by historical standards.
Another problem is a Federal Reserve that has failed miserably – in both preventing the stock market bubble and in dealing with its bursting.
If the economy doesn’t recover, the Fed will be useless in the year ahead.
So I’ll get to the point: This could be a year of dramatic moves by the stock market, both up and down, as investors and corporations try to determine whether there will be an economic recovery of any strength.
You will need the stomach for a bumpy ride.
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