I think it's fair to say that the current market environment has been one where market perception has systematically trumped reality.
True, the recent debt crisis which caused literally a meltdown in the value of nonprime mortgage securities, arose because many financial instruments were so convoluted that no one knew or even had a clue for that matter, as to who owed what to whom. Again, all true.
However, I feel it is important to recognize that the persistent market instability of the last few months was magnified by the mostly negative comments from different financial sources about the state of the economy.
Of course, there is no denying that the credit crunch has affected the financial sector. But I thought the predictions of an economy at risk of being engulfed by spiraling inflation that could rupture the very fabric of American society was a bit of a stretch.
Consequently, investor anxiety and uncertainty negatively impacted the market, prompting its further deterioration which reduced investors to a point where they became quite defensive.
However, despite the negativity, things are looking up again. In the first session of the second quarter, all the major averages surged with the financials leading the way higher right across the board.
The warm welcome that Lehman’s (LEH) oversubscribed offering received, despite its heavy mortgage exposure, was seen as a vote of confidence in the broker.
If things were that bad, how would Lehman have been able to raise $4 billion? So, although there may be some troubles still out there, there seems to be a willingness from investors to invest. Of course, additional write-downs may be expected, but they won’t inflict the damage to valuations they once did making their impact in the market, insignificant.
Based on recent statistics, the U.S. economic slowdown may be nearly over, which is good news for many investments, commodities included. Both the March ISM Manufacturing (48.6 vs. 47.5 consensus) and February Construction Spending (-0.3% vs. -1.0%) data came out better than expected, suggesting a possible bottoming in manufacturing and construction.
Additionally, figures released last week and underreported by the media, points to a sharp jump in housing affordability. According to the National Association of Realtors, the house affordability index currently stands at 40, not far from a 10-year high.
To reiterate the point we stressed last week. Many housing stocks have risen sharply and are leading the market, suggesting that the housing crunch is getting closer to being over. Clearly, the end is in sight.
If the stock market hasn’t made a bottom - certainly, it is in the process of doing so. Over the next couple of quarters the downside is relatively small compared to the upside. Folks, it’s bull time.