If the equity market managed to rally despite news that 533k jobs were lost from the US economy last month, then Obama’s pledge to increase spending this weekend and the developments for the Big 3 automakers will only help. Risk appetite appears to be slowly returning to the markets with the low yielding US dollar and Japanese Yen losing ground to higher yielding currencies such as the Euro, Australian and New Zealand dollars.
Aid is on the Way
The market’s immunity to bad news suggests that everyone is tired of hearing the obvious, which is that the US economy is in bad shape and will worsen before it improves. It appears that all of the weakness in the first half of the 2009 is priced in and instead investors are latching onto the stimulus plans for hope that they will help to trigger recovery in the second half of 2009. This weekend, President-elect Barack Obama laid out his plan to create or preserve 2.5 million jobs . His focus is on infrastructure – upgrading public buildings to make them more energy efficient, building roads and highways and modernizing school buildings. He is hitting the ground running and is expected to announce a $500B to $700B stimulus plan in the first days of his administration.
At a time when uncertainty about the US economy is at elevated levels, the prospect of a major stimulus package and a decision on aid for the Big 3 automakers is helping to improve investor sentiment. The Big 3 automakers have dominated the headlines for the past few weeks and regardless of whether GM and Chrysler will be forced into bankruptcy, the markets will be relieved that there is a resolution.
Of course, there is still plenty of reasons to be skeptical about the rally in currencies and equities. The layoffs keep coming in as Dow Chemical announces an 11 percent reduction in their workforce, which translates into 5000 jobs. Bonus cuts, salary freezes and warnings about earnings have also become the norm.
But it is important to realize that equities and currencies have become extremely oversold in the past few weeks and the lack of any major US economic data until Thursday is helping to fuel the recovery. I think that we are witnessing a bear market rally and that we have yet to hit a long term bottom.