Monday, October 13, 2008

Understanding the Stock Market Following the Bailout

Today it appears that the market has capitulated. Investors believe that the market has hit bottom and it is time to rebuild and to buy and is in the 9,000 points area and moving upwards. But people want to know, does this relate to the bank bailout? Why did the market perform so poorly immediately after the bill passed in Congress? Are we about to see the light at the end of the tunnel?
I suggested on my radio show that the market would probably stop its free fall in the low 8,000s and that appears to be the case. But, I have also suggested that this event wouldn't necessarily signify anything more than Wall Street catching its breath. Yes, it could mean it begins its mending process (as seen with the market up around 500 points at this writing), but it could be a short term euphoria from European and Asian markets that responded more favorably than expected over night or just a strong desire to give itself a break from the drama. In other words, the market is being driven by emotions at this time more than anything else and interpreting what is happening is no small task.

Here are a few observations about the current market landscape:
  • Members of Congress supported the spending of more than $800 billion to bailout financial institutions with much of the specifics of how it would be spent to be determined later (Obama and McCain each have very different approaches). This approach raises as many concerns as it placates.

  • The amount proposed, $800 billion plus, was pulled completely out of the year. A high level Department of Treasury official said that this figure was chosen because it "needed to be real high." They had no idea how much was needed, because they weren't sure how it would be fully implemented. Again, this has raised more market concerns.
  • Much of the drama surrounding this event -- most recently seen in the emergency meeting of members of the G7 -- is a mixed bag that could end up heightening fears rather than calming them. On the other hand, because of the interdependence of the international financial markets, some are seeing such an approach is crucial in getting back to normal.

In addition to the financial issues, there are the political aspects. Many in the media are treating Presidential candidate John McCain as if he were among the "walking dead." Wall Street believes that the economic future of this country is in better hands under McCain than Obama. Is McCain's chances begin to decline, I project a continued drop in the stock market.

So are we on the rebound? I certainly hope so, but smart investors are going to find themselves taking a "one day at a time" approach to their investing.

Kevin Price articles frequently appear at ChicagoSunTimes.com, Reuters.com, USAToday.com, and other national media.

Kevin Price is Host of the Price of Business (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review. Hear the show live and online at HoustonBusinessShow.com. Visit the archive of past shows here.

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