Bear Market Rally

Good news: the stock market thinks we're going to be fine.

Commodity and stock prices performed this week, indicating that portfolio managers have finally begun setting up their 2009 strategies by investing in US equities. The December/January period is the busiest period of the year for my folk - amidst the Holidays, you have a transformational event in the retail industry to analyze. Not only that, but investors typically really look at their portfolios in January and readily invest in the year set to unfold before them.

It used to be that you could do something called a "January arb." The markets used to have an irrational value spike in January as all the new portfolio money that was in cash got invested as everyone set up initial positions for the year. That's largely over now - it's slower, smaller, and starts in December.

But at least Santa will come, because investors this week watched stocks go up and built on it. That's an interesting phenomenon indicating that the worst may be over for your 401(k), if not the job market or the economy generally - markets values tend to precede depressions and the recovery starts in the indexes first. Economists are universal in their negative GDP forecasts for Q4. But going forward, there's a growing sense that late 2009 will bring healing and recovery, and a sense that this week's rally was an early investment on those happy returns.

My thought is that the recovery will be long and shallow. There will not be a satisfying, massive drop in unemployment or a big banner dropping to say "RECESSION OVER!" 2010's election characteristics will be the best test of how we'll we're recovering - the extent of voter attention on economic issues should be an interesting insight into national psychology. I suspect we'll find voters obsessed with the usual cornucopia of pointless bickering about flag pins and abortion, which would be a comfort.