After putting in an emotional bottom nearly two weeks ago, the market has since turned back upward with considerable force. While lately we had been nervous that the bottom could fall out and stocks could be headed to new lows, stocks put an end to that when they had a severe sell-off, then abruptly turned on a dime and headed higher.
This more recent market action indicates that while it is still possible that stocks could turn back down and retest their lows, it is now much more likely that stocks will continue their upward trend, after a quick downward correction in the near future.
After seven consecutive days of bullish trading, the market is in need of such a correction in order to continue a healthy upward trend. Such corrections occur no matter which direction the market is heading in, and serve to calm any excess exuberance on any one side of the market.
Interestingly enough, stocks have lately been on the rise despite the US dollar falling in global currency markets. In fact, equities seem to be rising more quickly when the dollar falls faster. This could be indicative of foreign capital returning to the US markets as the dollar weakens.
As the dollar weakens, foreign investors benefit more from the exchange rate, receiving an increasing number of dollars per unit of foreign currency, Euros for example. If foreign capital truly is beginning to flow back into the United States, it would tell us that the US is beginning to look relatively safe to foreign investors, which is absolutely critical for our role in global economy.
This weakening of the dollar is something that we have seen coming from quite a ways off, and have written about on numerous occasions. Our case was supported earlier this week by an article in the London Financial Times, which cited published remarks from China’s premier, Wen Jiaboa, as saying that China would be using substantial portions of its foreign exchange reserves to buy foreign companies.
These comments have been interpreted by HSBC’s chief China economist, Qu Hongbin to mean that China will be diminishing its US dollar reserves in order “to reduce its reliance on the US dollar as a reserve currency,” (Anderlini, Financial Times).
As I’ve argued previously, China has taken advantage of this crisis in order to better its economic position internationally, and it is likely to emerge as one of, if not the world’s foremost economic superpower.
The economy, from a domestic standpoint, certainly may not be getting better, but at the moment it doesn’t seem to be getting any worse, with the obvious exception of unemployment. However, overall the market seems to like the news that has come out recently. This should imply that the market will continue its recovery, so long as the economic numbers being released don’t get any worse.
Remember that unemployment is a lagging indicator, while the stock market is a leading indicator. Generally speaking, the stock market will begin to improve about six months before the economy does, while unemployment will begin to subside six months after the economy begins its recovery.