Even though the major market averages have all rallied this week after the Fed easing, history shows that investors may not necessarily be out of the woods just yet. In the face of the subprime mortgage crisis, which is still winding its way through the economy, and the subsequent problems for not only the mega-banks such as Citigroup (NYSE: C) but for regional banks as well, the homebuilding industry’s record woes, and the prospect of the consumer pulling in his horns, or at least holstering their credit cards, underlying economic problems may yet do more than tug gently on stocks.
The stock markets are many things, many different things to traders, investors, savers, professionals and amateurs, but it is in the nature of the financial markets to always ignore what people want or imagine them to be, and to do what it is they do on their own. Any investor who has wished a stock they’ve bought to go up, when instead it goes down, can attest to this weary wisdom.
The markets, by those who know them, Wall St. professionals, are regarded as a future discounting mechanism of the economy, not a responder to the economy as Main Street investors and savers view them. So, despite a consumer who may be feeling the pinch on his adjustable rate mortgage which is about to pop upward a couple of points, or another who’s facing a layoff, the financial markets have eaten all that information, digested it, and are now spitting out new behavior already: the markets headed up again—for now.
Still, there is the possibility that the perception of future news—perhaps even additional write-offs or large problems from the banks, or the more likely maybe the bond insurers—institutions that Main Street investors might want to educate themselves about may ripple through the stock market again. Or, this rally, as has historically happened, may be a pause at one leg down in a terraced-market downturn that can last a year or two. Nobody, not even the professionals, know for sure. That’s why many of them don’t like to be too long—holding too many dicey positions—over the weekend.
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