Market Summary

As you may have heard, September 2010 marked the best return in the S&P 500 during the month of September since 1939. 

That's 71 years.  It's enough to make one wonder why the market isn't going down like it's supposed to.  Yes, earnings reports have been favorable (see below) but consumer confidence fell last month, gold is at an all-time high (indicating severe inflation jitters), unemployment is stuck at 9.6% (significantly higher in California) and the housing markets remain horrible. 

What is going on here?

The disconnect between the economy and the stock market - which hit a five month high last week - is not terribly surprising, in fact it happens all the time.  Market activity (i.e. changes in the price of stocks and stock indexes) is nominally based on price valuations, high volume and mechanized trading, changes in global currency rates, and intermittent government reports such as housing, earnings, manufacturing and unemployment.  Indeed, corporate profits have been very favorable over the past 60 days, and who says you need a vibrant economy to rake in stupendous profits?

However, an equally significant determinant of bull and bear markets is emotion... human emotion, most notably fear, greed, hope and faith.  This has always been the case, but it is easier for the emotion of fear to help drag the markets down than it is for hope to pull the markets up; historically, fear is much more contagious than hope.  Still, the disconnect between reality and the price of stocks happens on the up side as well, in spite of the condition of the economy. 

Whether the major stock indexes continue to rise for the duration of the year and beyond is, of course, anyones guess.  The persistence of these disconnects make it improbable at best and impossible at worst to successfully forecast or prognosticate your way to market gains.  As always and ever, moderation, balance, and the proper level of diversification given your life objectives remains the best methodology.

TARP Retires

The Troubled Asset Relief Program (TARP) wound down to its official close earlier this month.  On Tuesday the Treasury Department released its latest figures on TARP, and its findings were that the $700 billion rescue plan will end up costing taxpayers $50 billion when all of the numbers are tabulated.  In fact, Daniel Gross of Yahoo Finance cited sources which estimated that holdings in the insurance company AIG will actually reduce the final TARP exposure to approximately $30 billion.  To put these numbers and their improvement in context, the government forecast a price tag of $341 billion for TARP in the summer of 2009 and revised the cost to $91 billion in the summer of 2010.

While not inconsequential, $30-$50 billion is likely to rank as a relatively small expense to pull the financial system back from the brink of a potentially devastating and widespread meltdown.  Neel Kashkari, the original head of TARP, has proclaimed the bailout program to be far more effective and much less expensive than anyone involved had reason to expect at the time. 

As the curtain comes down on TARP, the landscape that caused its creation has changed in the intervening two years.  Two of the major underlying causes of the financial crisis - excessive leverage for financial firms and inflated home prices - no longer exist.  The structures of some notable banks, investment firms and automobile makers have been reconfigured.  Legislation has been passed by Congress that constitutes the first attempt to contain the "too big to fail" problem, although the effectiveness of these new laws remains to be seen.

What about life after TARP?  Investors still have plenty on which to focus.  Wall Street always has a "wall of worry" to climb, and although that wall has been successfully scaled since the market bottomed in March 2009, the unemployment figures alone should continue to temper any truly impactful bull market, disconnects notwithstanding.