Short-term leaps in the Dow and other major indexes are the least of the indicators that we’re truly out of the woods. Michaels says there are many other signs to look for that the economy is on firm footing.
“I think credit needs to start flowing through the system. We need to see a stabilization in company earnings, we need to see credit spreads tighten. They’re very wide right now. We need to see banks lending to each other.”
That isn’t to say that the capital injections won’t do anything, but they could take some time to work. We’ll continue to see volatility until that happens, Michaels points out. But until then, the stresses weighing down on the economy need to be significantly reduced.
“I think we’re a good six months away,” he says.
Irwin Kellner for MarketWatch points out that typically after everyone throws in the towel, selling reaches a climax and sends the stocks to a bottom for that cycle. Stock prices were driven to such low levels, it drew out the bargain hunters.
The stock market is just a sideshow to the frozen credit markets, which are truly the crux of the problem. Thawing them out will involve restoring confidence in the entire banking system, both in itself and among others.