Bear or Bull: Has the Stock Market Bottomed Out?

Over the past few weeks, I have spent time discussing various issues in the economy, from the $700 billion bailout plan to presidential fiscal policies. In the end, no matter what any analyst or I think of these issues, the ultimate judgment is made by the stock market. It is the number one indicator for the health of the economy, and over the past year the S&P 500 has declined ­­­34 percent, making it one of the worst bear markets yet (see below, left). The thing that makes this market so odd is not the fact that it has been declining; many people anticipated the burst of this current bubble. It is how volatile and unpredictable this market has been that makes it so odd. Drops of hundreds of points one day are followed by gains of hundreds of points the next. Negative economic news makes the market rise, positive news makes it drop. Recently, however, the market has been especially unpredictable. October was the worst month in 21 years, but the last month of October marked the largest weekly gains the market has seen in 34 years (see below, right). Does this indicate the market has bottomed out, or is it just another example of the market’s odd and irrational volatility? With this question in mind, I decided to explore the blogosphere and see what others believed. Like before, I found two blogs that had especially interesting discussions about the topic and left my feedback on them. In the first blog, The Big Picture, Barry Ritholtz discusses other predictions for the bottom in an entry titled “Race to Call the Bottom.” He does not try to predict the end of the bear market but instead talks about the absurdity of some of the predictions out there as well as how unlikely it is for someone to be able to know the market well enough to predict when it is going to bottom. In his blog on the website Seeking Alpha, Ian Cooper tries to address the issue in an entry entitled, “The Economy’s Worst is Still Ahead of Us.” He believes the worst of the crisis is ahead of us, and quotes Nouriel Roubini, a New York University professor, in order to back his point. Roubini was one of the few who has predicted this financial crisis for years and, according to Cooper, has emerged as a leading commentator on the crisis. For your convenience, in addition to posting my comments on each respective blog, I have copied them below.

“Race to Call the Bottom”
Comment:
Thank you for your article about the absurdity of trying to predict a bottom of the market and how every media outlet is searching for “experts” to give them a number the market is going to bottom out at. The entire concept that a person is able to accurately predict a number at which the stock market will bottom out, even within 100 points, is asinine. There are so many factors that control and direct the stock market. Some are measureable, others are not. I can understand how analysts arrive at their estimates and their importance to investors, but in the end, they are only estimates. For a news outlet to take those numbers and quote them as if they are an assertion of fact by that analyst is just irresponsible. I especially liked your example of Peter Boockvar being quoted in the New York Times as believing the Dow would bottom at 5,000, despite the fact that he had really only come up with a range of 5,000 to 7,000 in which he could see the market reaching its bottom. His quote is especially meaningful, when he says, “No one’s smart enough to answer the question as to where we’ll be a year from now. I think it’s silly to pick a number.” Is this fact such a difficult concept to grasp? As you say yourself, “The track record of economists and strategists is notoriously poor, no one ever consistently gets the year out forecasts correct several years in a row – it’s just totally random.” Do reporters and analysts actually believe that they are going to be correct when they throw out these seemingly arbitrary numbers of where the market will bottom, or are they only creating these numbers for others to read so that they can get some publicity or sell copies of their articles?

All in all, thank you again for this commentary on the folly of market forecasts, especially the narrow forecasts we have been seeing lately. In the future, I would love to see more discussion of the extreme forecasts you mention earlier in your article or a continued discussion of other forecasts for this particular market. Really, all an analyst can do is give a broad range of numbers he or she believes the market will drop to or give an opinion as to whether the current market is at its bottom at the time. I believe these specific forecasts to oftentimes be little more than publicity tools, yet people will continue to look upon them as fact until more people like you come out and call them out for what they are: overly speculative educated guesses.

“The Economy’s Worst is Still Ahead of Us”
Comment:
Thank you for your interesting piece about how the market has not reached its bottom. It is interesting to see how often Wall Street is dominated by a group think mentality. I feel that all it takes for a temporary spike in the stock market is for a handful of analysts to come out with a positive outlook on the market and everyone else will buy into it. Are these people not supposed to be some of the brightest in the country? Are they incapable of looking at some of these facts and realizing that, although we do not know exactly when the market is going to turn around, it probably is not at this exact moment? Looking at the past week, it is shocking to see how irrational the market has been. Consumer confidence fell to an all time low (almost 15 points below the Street’s estimate) and yet the market rallied nearly 900 points. Additionally, the United States GDP declined for the first time since 9/11 and real consumer spending fell for the first time since 1991, and the most since 1980. I am not sure which part of this news indicates to investors that the market has bottomed out.

If what you and Roubini say is true, and that hundreds of hedge funds will go belly up and the Option ARM loans result in a second financial crisis, those optimists are in for a rude awakening. On that note, I wish you had gone into greater detail about why the hedge funds are going to fail or when the Option ARM loans are going to begin resetting. The prediction that the hedge funds will go belly up loses some of its credence when you do not back it with any reasoning, only repercussions. You explained the Option ARM loans well, but by not including an idea of when to expect that crisis to begin, all you did is raise my blood pressure. However, those two do not take away from the fact that this was an eye opening piece about where the market has the potential to go. I am hoping none of your predictions come true, but look forward to continuing reading your blog in the future.

A Wealth of Knowledge: An Exploration of the Online Financial Community

As I was sitting down this week to do my daily perusing of the internet to see what is happening in the world and the economy, I realized that my blog is lacking any reference to the vast financial and economic online community, the goal of which is to keep its readers up to date on all that is happening in the economy. With this in mind, I chose to explore the internet and develop a robust linkroll of resources to complement my own posts. In order to ensure I only included the best sites, I used the Webby and IMSA criteria when evaluating these external sources, evaluating them by their content, structure, visual design, functionality, interactivity, depth, and activity. After extensive research, what I found were twenty resources that provide unique and valuable insight into finance and the economy. I have included links to them in my linkroll on the right. These sites can be broken into four categories: news, government, research and opinion, and private equity/investment banking. In order to further educate my readers, I have chosen to give a summary of the strengths and weaknesses of each.

The news sources offer up to date commentary and reports of what is going on in the world. They are laid out similarly, but are often difficult to navigate due to the abundance of information on their pages. For the most part, they also lack in-depth analysis of current issues. Among the news sources listed, American Banker is the least known. Its site is simply laid out and reports the major economic headlines as well as giving an analysis of that news. However, its navigation bar was vague and is grouped into odd categories like mortgages and retail delivery. The Wall Street Journal is the best known of the news sources, and its U.S. Business site’s “What’s News” section (see left) offers brief summaries of the headlines for the day. However, the reader looking for headlines across a broad scope of industries and economies will become frustrated, as the website is segmented into over ten categories, each of which has between five and ten sub-categories. Those looking for more general news should go to CNNMoney.com. Its homepage has headlines spanning a wide variety of classifications, but due to the large quantity of headlines it covers, the site is cluttered with news that is often trivial or unhelpful. While the previous three sites are more traditional news sources that give a report of what happened earlier, Yahoo! Finance and Bloomberg Market Data offer real time updates on the market and major news. The two sites complement each other well; Bloomberg Market Data has detailed data of the market’s performance with no explanation of why while Yahoo! Finance focuses on top stories that affect the market with data on only the major U.S. indices.

When reading the previous news sources, readers may notice references to various statistics as indications of the health of the economy. Rather than wait for one of these statistics to be referenced in an article, The White House Economic Statistics has every statistic that offers any indication of the health of the economy. However, these statistics are not always intuitive, and the site offers little explanation of the significance of the different numbers. A simpler way to gauge the health of the economy is to go to the Federal Reserve website and see what the recent developments are. They give a good indication of how the economy is faring, but the data is incomplete, for the Fed only offers information on things it has done, not those it is considering doing. For those more concerned about the future performance of the economy than its current health, Barack Obama and John McCain’s economic policy pages give a hint as to what the regulatory environment will be for business in the next four years. Though Barack Obama’s page is much better organized than John McCain’s, I find both to be overly flashy and lacking a concise summary of what they want to do.

Some of the least flashy pages are the best sources of news or in-depth analysis of various news items. These sites are the ones I have classified as research and opinion. Economy Society is business consultant Bill Birnbaum’s forum for discussing his predictions for the future of the economy. His blog has interesting information and opinions, but its credibility is reduced by how cheap the website looks. Focusing on more current issues, Rogue Economist Rants and The Common Man’s Politics provide alternative perspectives on many issues. Their major problem is that they lack credentials. The Common Man’s Politics provides no credentials for its author, while Rogue Economist Rants only offers vague credentials for its author as having experience as a banker and consultant. The final three blogs in this category do not suffer from such a lack of credentials. Financionomics is written by an MBA candidate with a Post-Graduate degree in Economics, Freakonomics is written by the bestselling authors of the book Freakonomics, and The Conscience of a Liberal is written by Paul Krugman (see right), who was awarded the Nobel Prize for economics on Monday. Of these three, Freakonomics is my favorite, because it comments on such a wide scope of issues and makes bold statements whenever it can. These blogs are hard to critique, and my only complaint would be that their entries tend to be shorter, as they do not seem to ever settle on a single topic.

Outside of the resources focused on the market and economy, the sites that discuss private equity and investment banking are the most interesting to me, as those are the industries in which I plan to pursue a career in the future. DealBook, peHUB, and Financial News: Private Equity News are all fantastic resources for updates on recent mergers and acquisitions activity as well as other developments in the industry. Their main shortfall is how difficult each one is to navigate. A last resource anyone interested in investment banking or even finance in general should be aware of is Thomson Reuters League Tables. This resource provides information on the number and size of deals each major investment bank has announced or completed, and is used to rank investment banks as well as determine trends in the investment banking industry. It is a bit difficult to navigate and its files are often slow to load, but to investment bankers, the information it holds is well worth the wait.