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The March market rally, the biggest monthly increase since 1994, has been driven by optimism triggered by the promise of additional federal aid for the economy, but fundamentally little had changed. Despite the rally off the lows, the market is still down significantly from its 2007 high – or even from the beginning of the year levels. This may help to explain why even bad news, such as a possible bankruptcy of the U.S. automakers, is frequently outweighed by small positives and is taken in stride.
Controlled bankruptcy for GM and Chrysler is more and more likely, especially after the forced resignation of GM’s CEO Rick Wagoner. While a failure of either or both of these automakers will directly cost tens of thousands, if not hundreds of thousands, of jobs and threaten many more, the controlled bankruptcy would help to mitigate the effects.
Last weekend’s Treasury Secretary Geithner’s remark on a Sunday morning talk show that some banks may need a large amount of assistance was a wakeup call of sorts to investors that the public-private partnership plan unveiled last week is far from a guarantee of success and that the major U.S. banks are still in trouble.
What we are hearing from the banks indicates that this could be the case: Jamie Dimon, CEO of JPMorgan Chase said in the recent interview that the conditions in the month of March worsened. On the other hand, Deutsche Postbank said today that turnaround in the first quarter is likely and that it possibly broke even during that period.
However, officials believe the plan will work, and that helped sustain the rally in both the financial stocks and the market. Echoing that, Royal Bank of Canada’s CEO said today that the worst of the financial crisis may be over.
We have also seen some tepid signs of improvement in economic data, such as unexpected increase in existing home sales. Manufacturing, while still contracting, also exceeded bearish expectations of economists.
The question remains whether the market is still oversold. In addition to banks’ and carmakers’ problems, consumer confidence is still near an all-time low, housing prices keeps declining, job losses are over 600,000 for the 4th consecutive month, to name a few troubling numbers. We are still a long way from the end of this economic ordeal and we are not yet seeing big enough fundamental improvements in the economy to back the rally.
Until Next Time,
Your ETF Trader Team
