New York Stock Exchange trader keeps his eye on the monitor
Then there's 262 and 217, the Dow's gains Friday and Monday, respectively, as the index posted its biggest back-to-back percentage gains since September. Then there's 3.5 percent, Merrill Lynch's brand-new forecast for GDP growth, revised upward Monday from 2.0 percent, and Morgan Stanley's even more bullish Monday upgrade to a forecast of 4.5 to 5 percent. And those forecasts are just for the first quarter.
In just two days, Wall Street has seen Alan Greenspan's cautiously optimistic prediction of the near-term economic picture — an anemic 2.5 to 3.0 percent GDP growth for 2002, with plenty of cautious caveats — and raised him a whole bunch of exuberance. Forget the glass-half-full predictions of a "U"-shaped recession (gentle recession, gentle recovery); laugh at those who worried about an "L" (steep recession, very gentle recovery) and twelve more months of thirst. Investors are now back to betting big on the "V" — the snap-back boom.
The big picture, according to the markets, is that advances in inventory technology have shortened and softened business cycles by making companies more nimble. The small picture is that from last March to this winter, the U.S. economy did indeed hold a recession — but hardly anybody came. As more companies emerge with their fourth-quarter numbers from the last three months of 2001 — at least those that haven't delayed their reports to double-check the books — investors appear increasingly convinced not only that the shortest recession in recent memory was also one of the gentlest, but also that the sailing will be smooth all spring.
Wall Street, of course, has developed a well-deserved reputation for rustling up rallies (or tech-stock bubbles) by dint of sheer will and optimism, only to sag mournfully when reality refuses to cooperate. Investors tried this trick before, pushing the Dow above 10,000 in December and January on hopeful corporate and economic news — only to run into Enronitis. Now they're back at it, and even if the next few sessions take some of the steam out — there's always profit-taking and second-guessing, even when herd is celebrating — the cries of "bottom," for the economy and the markets, have never been so credible. The future's so bright, they're buying GM.
There's just one jury still out — the consumers. The stalwart American shopper led the economy (and particularly GM) back from the Sept. 11 depths by coming out for all the post-terrorism sales and buying zero-interest cars by the truckload, and then kept it going relatively strong throughout the winter. Now it's spring, time for businesses who spent all winter burning off inventories — a record $120 billion in the fourth quarter alone — to make new stuff for consumers to buy.
That raises the question of demand. As a recession winds down, businesses make like groundhogs and come up for a look around. If they can see shoppers, they start producing merchandise; if the merchandise sells, they turn a profit, proudly tell Wall Street, and then — maybe — they start hiring back some of the people they laid off when demand dried up. No shoppers, no capital investment. No capital investment, no increase in production. No increase in production, no re-hiring. No re-hiring — no V-shape.
Wall Street may be taking consumers — two-thirds of the economy — for granted. Unemployment is still high enough to dent consumer sentiment (which dipped in February, incidentally, for the first time in five months) and it'll probably keep going up until the recovery really is here. Will those with jobs be able to stay optimistic that they'll keep theirs? Have enough of the laid-off been coasting on severance packages to keep spending as if they had jobs? Does anybody have any more room left on their credit card?
Friday's unemployment number for February, the only big economic news of the week, could make or break the current euphoria; beyond that, retail sales should be king as investors check and re-check their premises about consumer demand still being there when supply picks up. If the Dow and NASDAQ are still over 10,000 and 2,000 in two weeks we'll at least know that Wall Street's current exuberance was serious. If they're still headed north in two months — at the rate investors are pricing in this recovery, that's no sure thing even if it does show up — we'll know it was rational, and not just another insidious analyst-banker conspiracy of hype. Or foolishness.