TIME.com: So what happened to the rally?
Dan Kadlec: I think this is the pattern we're going to be seeing on Wall Street for a while. We had a really nice rally — the Dow has really surged, picking up 800 points since what was seemingly a spontaneous turnaround Thursday afternoon, and even the NASDAQ has been pretty strong.
You start to feel good about it, and then some more earnings hit. Wednesday you had Disney's layoffs and Nortel and Palm announcing bad earnings news, and suddenly you realize that there's not gonna be the fast rebound everybody loves to talk about.
The markets rally for two to three days, and everybody gets excited. And then the reality of the slowdown comes back into the picture. And when you get that bad news from Palm, in a hot area like hand-held, and you see that slowing, it hits especially hard. And every bit of information makes you reassess what you thought you knew before.
The markets are obviously a lot better at discounting what the Fed's about to do than what companies are about to do. What has to happen before economy-related earnings news stops killing the markets?
DK: We've got to get to the point where reports like this don't surprise us any more. There's a point — and we've been waiting for a while — when investors just accept that this bad earnings news isn't about the company, it's about the economy. And then you start applying that to all your estimates, and reducing expectations, and bad news doesn't shock the markets anymore.
There's still a number of investors who are in denial, who think that this company or that is going to thrive despite the slowdown. Palm was one of those. But every warning brings another couple of them off that list, and we get a little closer.
Do we have a time frame?
DK: I think it'll be a few months before we get any real visibility on the economy. Tuesday's news about consumer confidence is a sign that we may have seen the bottom in terms of the overall economy, and that's encouraging, which is why we saw a nice rally in the wake of the report. It's a glimmer of hope.
But capital spending is till going down the tubes, and Wall Street continues to fear for companies. If the economy has really turned around, eventually the markets will get in line with that. But what's happening Wednesday should pretty much give the lie to the idea that with one rally and a good consumer confidence report, it was going to be all bulls from here on out.