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Don's Outlook: Bulls Grow Bolder While Bears Lurk

U.S. investors shrugged off a dismal first quarter GDP report and pushed equities higher, and the Federal Reserve made no policy change on a wild Wednesday. Things heated up overnight in the Asian markets after Japan reported positive industrial production numbers and bulls quickly declared a bottom. Finally, Taiwan’s decision to allow Chinese institutional investment in the stock market sent the Taiwan index up nearly 7 percent.

 

The Commerce Department released its advance U.S. first quarter GDP report, which showed the economy declined at a 6.1 percent annualized rate. Two more reports will follow this one, preliminary GDP and then final GDP. Later, a revised figure will be calculated, and that will be the final number unless there are historic revisions at a later date. Frequently, there is a statistically significant change in the data, though investors and the general public may not view it as meaningful. In the current economic climate, however, the chances of a significant revision in the coming weeks and months are higher. The large swings in economic data and month-to-month volatility makes this number less valuable than during a period of steady economic growth.

 

The Federal Reserve said it sees signs of economic stabilization. The first sentence in the FOMC statement reads: “Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower.” Former Fed Chairman and economic adviser to President Obama, Paul Volcker, also said he sees the economy stabilizing.

 

Japan’s industrial production did stabilize in March and increased 1.6 percent. Japan’s Nikkei rose 3.94 percent on the news, undoubtedly helped by the rally in U.S. shares. Meanwhile, Taiwan’s market benefited from rapidly warming cross straits relations. China allowed Taiwan to join the WHO as an observer, something it had opposed for years. China Mobile quickly took advantage of a deal allowing closer investment ties on Sunday, announcing the purchase of a Taiwanese company on Wednesday. And with the door open to Taiwan’s stock market, potentially billions in investment dollars could flow into the island’s economy.

 

The bulls are growing bolder and the bears are growing more numerous. It’s possible that early bears were forced to cover their shorts during the recent rally. It has the hallmarks of a market melt-up, but the mood of the investing public is clear. The news has a positive spin, except for swine flu, because investors are in a good mood. With stimulus spending set to kick in soon, this rally could have farther to run.

 

Don’t substitute short-term panic for long-term planning. If you find yourself unable to avoid emotional investing decisions, please call Dion Money Management at 1-877-850-7942, ext. 191 to either speak to me or one of our portfolio strategists, and we can devise a disciplined strategy for recovery.