A Fourth Quarter Preview

The third quarter 2009 is in the books and for the stock market, it turned out to be the best quarter in 11 years!  Unfortunately that is history and the future starts now.  What will the fourth quarter bring?  More upward momentum?  The likelihood of a continuation is very slim in my opinion for the following reasons.

The first is technical.  While the market has now been up six straight months, it has been rising as monthly volume declined in five of the last six months.  In all of stock market history, there has never been that type of price / volume divergence for longer than two months.  The end of quarter rush to get in is the reason September volume rose, however the fuel to drive the market higher is running on empty as insiders and institutions have now taken their positions and are more likely to exit the market.  Individual investors may be inclined to buy the dips, but institutions drive the market, not individuals.

The second is fundamental.  The economy is still getting worse - only less quickly.  While beating worse than expected numbers caused a huge impetus to buy stocks last quarter - going forward that song won't sing.  Unemployment and housing are the major factors affecting the overall economy and neither is showing gains year over year.  Having only 250,000 people lose their jobs last month according to ADP Employer services - does that actually show improvement?   No!  How about the ISM Chicago business barometer decreasing to 46.1, below forecast and below 50, showing contraction - that's not good.  The Case Shiller Home Price Index also still shows home prices in the 20 major metro markets down over 14% year over year.  Consumer confidence also dropped from August to September demonstrating that in spite of the government's best efforts to pump money into the banking system and other industries, the general public is still seeing red.

A recent Gallop poll said 71% of people are cutting back and 90% are watching what they are spending.  When fourth quarter corporate earnings numbers start to be released late next week, the stock market will need to see growth in year over year earnings - not just better than expected numbers.  To the degree that actual growth does not occur - investors will quickly realize that this market has traveled up too far too fast and a correction will occur.  The correction could be fast and furious scaring many "Johnny come lately" investors, who sold last November or this past March, only to have regained faith in the last several weeks.  That faith, I feel will be irreparably damaged and we could lose a generation of investors.

Another area of concern could come from forces outside the stock market, but could still create an adverse effect.  Problems from Iran and other points in the Middle East could be out of our control, but create a negative situation for our markets.  The US dollar and the dependence of foreign countries to buy our bonds is another area of concern.  We are trying to finance so much debt at record low interest rates, with a declining dollar, that if some of our "partners" don't show up to the table we could be in for a shock to our system.  We would be forced to raise interest rates which would cause another leg down for housing that could snowball across the entire economy.

Let's hope I am wrong.  Let's hope we thread the needle.  Let's hope we all don't choke on the massive amount of debt we've produced and the consumer is willing to grow their own personal debt for the sake of jobs and the economy.  Let's hope we can all get along in the nuclear armed sandbox and let's hope foreigners continue to buy our debt to keep us Americans in the lifestyle that we've grown accustomed to.  Time will tell, but count me in the group that is not that optimistic for the fourth quarter.