Market bottom or another sucker’s rally?

Wall Street gave an initial thumb’s up to Treasury Secretary Tim Geithner’s plans to buy up billions of dollars in bad loan assets. Bank stocks surged and the Dow rose nearly 500 points Monday, extending a two-week rally in stocks that’s brought the S&P 500 up nearly 20%. While it remains to be seen just how [...]

Wall Street gave an initial thumb’s up to Treasury Secretary Tim Geithner’s plans to buy up billions of dollars in bad loan assets.

Bank stocks surged and the Dow rose nearly 500 points Monday, extending a two-week rally in stocks that’s brought the S&P 500 up nearly 20%. While it remains to be seen just how effective Geithner’s latest plan is in stabilizing the financial system, the market’s reaction certainly makes you wonder: Did stocks hit bottom in early March or is this just another bear market rally? That’s the billion dollar question that everyone wants answered, especially if you’re an individual investor who has been sitting on the sidelines in cash.

There’s plenty of reasons to think the stock market has further to go on the downside: unemployment is expected to continue rising, credit card default rates are soaring and home prices are still dropping in many areas. You can counter that with the notion that the stock market is forward looking and along with the Treasury Department’s multiple programs to fix the financial markets,  there  are nascent signs of economic recovery that could continue to fuel stocks. Those sprouts of good news include better than expected retail sales and a 5% surge in existing home sales in February.

We should all be wary of market prognosticators but some voices are worth listening to, including Nouriel Roubini, the NYU economics professor who earned the nickname Dr. Doom after accurately predicting in 2006 that the housing bust would unravel the financial system and lead to a deep recession in 2008. Maybe he’s just trying to live up to his nickname but the prescient Roubini writes in a recent posting on his blog that we’re in the midst of another sucker’s rally.  Roubini wrote in early March that policy stimulus programs in the U.S. and China could drive a rally in the second or third quarter of this year but given the severity of “macro, household, financial firms and corporate imbalances” in the U.S. and around the world, this “sucker’s rally” will fizzle out later in the year like the previous five seen in the last 12 months. We can always hope that Dr. Doom’s streak is ending. - Donna Rosato