Open Thread: Stock Market Editionby Brad Warbiany
Two weeks ago, the Dow hit a major low at 6440, closing slightly higher. This made a lot of sense to me, given the fundamentals of the economy. In fact, I nearly posted a rather snide article on CNBC “calling the bottom” that morning.
But then things changed. The Dow has been on a tear ever since, culminating yesterday in a 500-point rise. This is a 20% rise since its lows of merely two weeks ago. And I just don’t understand why.
I see three potential explanations:
- We’ve hit the bottom of the recession, and the 6440 low was an undershoot on the downswing, which was bound to be quickly reversed.
- This is a sucker’s rally, and the Dow will soon drop again.
- We haven’t hit the end of the recession, but the inflationary policies of our government are going to cause a rise in equity and asset prices.
I don’t believe the first. I can be wrong on that, but I think there are structural monetary and economic issues that are still bound to unwind. The government is trying to reinflate the bubble, but I think there’s too much leverage working against them.
I can easily believe the second. I think there’s quite a lot of downside risk, and after such a phenomenal drop, I actually believe there’s plenty of suckers who thought we’d hit bottom.
What really worries me is the third option. If the inflation is starting, this has significant impact on my personal situation. As a renter, I want to purchase real estate before the inflation really hits, locking in a nice low fixed interest rate on a home that’s going to rise in value with the devaluation of the dollar. If the interest rates spike before I can buy, I may be locked out of ownership in any of the neighborhoods I’d actually want to live in.
So what does everyone think? Where will we be in a month, in 6 months, and in 18 months? Is this a sucker’s rally, is this the start of the great inflation, or is this simply the bottom of the recession and things are looking up?