The stock market continued to move steadily higher over the past week as investors seem to no longer be worried about an imminent double dip recession. The drop from the yearly highs in the spring was largely about steadily deteriorating economic data. The data did not suggest the recovery had been aborted and growth was negative but it indicate a significant loss of upward momentum. The analogy I drew with clients was a plane losing speed. The plane's forward motion can only slow so much before it begins to point down. The weak summer action in the stock market was created by a fear that the economy was slowing so much that it was inevitable a double dip recession would be shortly at hand. The fear was heightened by May's Flash Crash, which seriously undercut investor confidence.
More recently the economic data has stabilized. The figures still are not great. The data says GDP growth in the second half of 2010 will be slower than the first half of the year and slower than most prognosticators expected as recently as Spring.
But takeaway the fear of the double dip and combine it with extremely pessimistic investor sentiment in late August and the setup for a rally was in place. The strength and persistency of the September rally has surprised most everyone. The fact that most investors were leaning the wrong way entering the month has helped fuel the rally as lots of people were underinvested and are stepping up to buy any dips.
What happens next is always the question most investors want answered. Today's conclusion of the Federal Reserve meeting and fresh statement will likely control the near-term. Higher stock prices have raised expectations going into the meeting. An announcement that at least confirms the possibility of more easing is probably necessary
