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This Rally Has Got to Give

By Jordan DiPietro | More Articles
December 2, 2009 | Comments (6)

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Every day, someone different is calling for an end to the rally. I've even written a piece laying out three reasons why the rally will come to a grinding halt. While none of us can time the market, we can certainly see the writing on the wall.

Criticisms withstanding, this upturn has been impressive. But it has been built on the backs of earning surprises and unexpected corporate growth. According to Morgan Stanley (NYSE: MS  ) , non-financial stocks in the S&P 500 beat 3Q estimates by an average of nine percentage points. Tech companies like Amazon.com (Nasdaq: AMZN  ) all the way to struggling car makers like Ford (NYSE: F  ) have chalked up huge surprises. For the most part, though, staggering earnings have been a result of controlling labor costs (see Time Warner (NYSE: TWX  ) ).

As The Economist notes: "Cutting costs makes sense at the individual company level but not in aggregate; one company's sacked worker or pay freeze translates into another company's sluggish demand."

In addition, companies and governments alike have been able to borrow at unprecedentedly low rates. But how long can rates stay so low?

According to The Economist, central banks are keeping rates low because "they are correct in assessing that the economy is still fragile ... or they are underestimating the strength of the recovery, in which case inflationary pressures will start to emerge."

One way or another, this rally has got to give.

How long until the rally subsides? Sound off in the comments box below.

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Jordan DiPietro doesn't own shares of any of the companies named above. Amazon.com is a Motley Fool Stock Advisor selection. Try any of our Foolish newsletters today, free for 30 days. The Fool has a wicked disclosure policy.


Comments from our Foolish Readers

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  • Report this Comment On December 02, 2009, at 1:13 PM, luvmtains wrote:

    I agree that the rally will end. The U.S. is living on borrowed money but the stimulus has given people hope. Eventually the stimulus (and the accompanied borrowing) will have to slow down. Priming the pump Keynesian style likely will not work because there are structural problems that remain in America (1) the trade imbalance, (2) the Federal government's over extension in spending and regulation (3) the artificial housing market and it's accompanying incentives. With that said, the rally could still continue for several more months.

  • Report this Comment On December 02, 2009, at 1:24 PM, daxtastic wrote:

    Nah, thing is I don't think it's really a rally. I think it's just a rebound from the "the sky is falling" sentiment that caused a hugely oversold market a year ago. I don't see much more upside, but I'd say things are pretty fairly valued now.

  • Report this Comment On December 02, 2009, at 2:18 PM, noryakerson wrote:

    A demented man in New York City spent 20-plus years on the streets of the city preaching to those who would listen that the world was going to end. On 9/11/2001 his prediction came true--for him. As he watched the "world" crumble before him, he had a massive coronary and died on the spot. His last words were not something like "I told you this would happen!", but were "I'm not ready to die!" For me, an incessant pondering as to when a rally will end and to what affect are a lot like this poor man. You stand in one place long enough, predicting the same thing over and over again, you're eventually going to get it right, whether you like it or not. The trick is to rise above the fray. Get the 60,000 foot few. Step off to the sidelines when the panic begins, and then step back in when things have cooled off.

  • Report this Comment On December 02, 2009, at 2:19 PM, noryakerson wrote:

    A demented man in New York City spent 20-plus years on the streets of the city preaching to those who would listen that the world was going to end. On 9/11/2001 his prediction came true--for him. As he watched the "world" crumble before him, he had a massive coronary and died on the spot. His last words were not something like "I told you this would happen!", but were "I'm not ready to die!" For me, an incessant pondering as to when a rally will end and to what affect are a lot like this poor man. You stand in one place long enough, predicting the same thing over and over again, you're eventually going to get it right, whether you like it or not. The trick is to rise above the fray. Get the 60,000 foot few. Step off to the sidelines when the panic begins, and then step back in when things have cooled off.

  • Report this Comment On December 02, 2009, at 3:28 PM, Optimyst wrote:

    noryakerson, That is one awesome post. One of these days, these incessantly negative Fool columnists WILL be right! But by that time, they will have lost out on very significant gains, and so will the drones that believe them!

  • Report this Comment On December 02, 2009, at 7:03 PM, DDHv wrote:

    Why worry about WHEN? Concentrate on recognizing the symptoms! We were buying heavily Jan>May this year, have sold out recently on our worst positions.

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