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Excerpt from the Hussman Funds' Weekly Market Comment (4/20/09):

The current bounce was fueled by a combination of deteriorating but “less bad than expected” economic reports (therefore counting as “upside surprises”), as well as what can only be considered misleading and semi-fraudulent earnings reports from distressed financial companies (the CEOs of these companies should be careful, because Bernie Ebbers is their poster child). Overall, the picture looks a lot like the bounce we observed in May 2001 (just before unemployment shot up and the market plunged again to fresh lows), when I wrote:

“I've noted that most of the talk of having hit bottom in the economy is without support from the data. I have very little doubt that rather than having hit bottom, the economy is about to turn far uglier, far faster, than most analysts imagine. The economic outlook is increasingly bleak, but I have no opinion about how long investors will be able to look over the valley (or canyon) in hopes of a recovery.”

The market enjoyed another bear market rally a year later, well before the final lows. Again, the rally was coupled with hopes of a recovery, fueled by “upside surprises” in measures that were actually still very tepid. While the recession was in fact already over, that didn't stop the market from suffering a near-30% plunge to the final lows. Prior to the breakdown of that 2002 bear market rally, I noted:

“I really believe that most of the optimism about the economy boils down to two sets of data –Federal Reserve moves, and confidence surveys such as consumer confidence and the ISM Purchasing Managers Index. Early last year, I argued that Fed easings were likely to be ineffective in an investment-driven downturn, and nothing in the lending statistics has yet changed that view. The confidence surveys, of course, were wildly skewed by 9/11 - particularly because they generally ask whether the respondent feels that conditions are "better" than they were the month before. Who would not answer "yes" to that question with the post-9/11 shock as the frame of reference? The difficulty is that this recovery in sentiment is now fairly complete.”

In short, we should be careful to make distinctions between what constitutes improvement, and what only constitutes a backing off from extreme risk aversion. Put bluntly, the economy is not improving, and it is not likely to improve within a few months, because we have far more defaults, foreclosures, and credit excesses to work through. It is simply not true that the stock market heads higher 6 months before the economy bottoms. That simplification was true of 1970 and 1975, but not much else. Rather, there is enormous variation, and about the only reliable tendency is that stocks are usually advancing strongly within about 3 months of a recession's end. That said, in the 2000-2002 plunge, the market didn't bottom until about a year after the recovery started.

Source: John Hussman: Wishful Thinking