Does the S&P 500 above 1,400 make sense?

Posted by: Ben Steverman on May 6, 2008

Stocks rallied in April and traders are wondering whether this is a short-term suckers’ rally or a permanent recovery from the market’s January-to-March blues.

I’m not sure either. But I like this comment in a research note from Steven Weiting of Citigroup on May 5: “It almost seems that going from near-collapse of the financial system to ‘business as usual’ has come deceptively easy over the past month.”

Sandy on the Housing Depression blog raises this same issue. “I do not see any fundamentals having changed since the Bear Stearns collapse - except [the] Fed bailing out everyone left and right.” If this is indeed the worst financial crisis since World War II, “then a mere 10% decline from the top does not seem like it’s enough.”

It’s true that the financial crisis and housing and mortgage troubles have hit the credit markets far harder than the stock market.

The recent rally is a good time to “take money off the table if you have any,” Peter Cohan says. “Why? Things are not good for the consumer who accounts for 70% of economic growth.”

But if only the housing and mortgage markets could stabilize, the bulls might be proven right.

Cyril Moulle-Berteaux argues in the WSJ today that the housing market is hitting bottom right now, putting an end to the crisis. Home prices are now low enough to attract buyers, he says. “Numerous households that had been priced out of the market can now afford to get in.”

Rolfe Winkler likes Moulle-Berteaux’s emphasis on affordability, but gives good reasons home prices could continue to fall. Inventories of unsold homes are still “off the charts,” and affordability would be hurt if incomes fall or interest rates rise, he writes.

UPDATE: Lenn Harley, a real estate broker in Maryland and Virginia, thinks Moulle-Berteaux is engaging in some “wishful thinking.” She writes: “Inventory is still growing. Move up buyers are still unable to sell or unwilling to sell at today’s market prices. Further, financing guidelines are keeping many credit worthy buyers out of the market.”

“Wall Street Weather” also has an interesting take here.

Reader Comments

John

May 6, 2008 1:07 PM

How can profits keep growing when salaries keep shrinking?

Pam

May 6, 2008 2:51 PM

Since April, the equity valuation / pricing mechnism has changed. Bad news are often ignored by the market. Good news are magnified. Most stocks are traded above 50 day moving average. The market has leveraged the FED's 800 billion financing to more than 1:100 ratio.

ADD

May 6, 2008 4:32 PM

The housing market is hitting bottom? Prices are attractive? Yeah right! Come to New Jersey and tell that to anybody under the age of 30. They very well might smack you across the face for mearly suggesting that prices are cheap.

GK

May 6, 2008 6:41 PM

The recession has ended, but the housing correct still has 2-3 years to unwind.

The reason that the broader economy is doing better than housing is

a) Tech is going strong
b) Exports

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About

Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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