After months and months of bad economic news and declines in the stock market and exchange traded funds (ETFs), the gloom was finally lifted last week, and even a little into this one. But does this mean that we have finally hit rock bottom?
Last week was all smiles on Wall Street, the markets jumped up 12%, two of the largest banks stated that they have gotten out of the red and have returned to profitability, General Motors (GM) said that it won’t need to borrow $2 billion from the government this month and retail sales were better than expected. In fact, the Retail HOLDRs (RTH) have been on a bit of a winning streak lately. As Thursday showed, though, we’re not out of the woods.
While some things are showing decent signs, they are still not indicative of whether or not we have hit rock bottom. Wouldn’t it be so nice if it were that easy?
Unfortunately, no one can call the bottom until well after it has hit and we have rebounded. However, Vikas Bajaj of The New York Times suggests looking at the following three indicators to forecast the future:
- The Stock Market: In general, the stock market hits bottom before the economy does. Currently, many stocks can be picked up at bargains, but that still is attracting many investors. In fact, most are still sitting on the sidelines which is supported by the $3.8 trillion sitting in money market funds. Some believe that the reason for this is the eroding pressure of deflation, and until deflation is nipped in the bud, stock prices will not continue to rise
- Housing Market. One way to see if the housing bubble has burst is to determine the ratio of purchasing to renting a home. If the ratio is relatively low, then houses are affordable and the market is not inflated. Another indicator is the ease of obtaining a mortgage.
- Consumer Spending. One sign that consumption has hit rock bottom is when savings rates start to flatten. Another is an increase in international trade. Generally, auto sales and homebuilding tend to lead recoveries in this indicator.
Although these are solid economic indicators of where the markets are going, no one is a mind reader or fortune teller and it is virtually impossible to tell if the economy has bottomed out. For this reason, we suggest utilizing trend lines, moving averages and having a strategy when considering entering and exiting markets.
Kevin Grewal contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.