Asset Junkie ! dot Com

By Ava E. Williams

After four consecutive declines, U.S. equity markets got a huge boost today, surging 2%+ to mark the biggest rally in three months. Upon close, the Dow stood up 200 points at 9963, the S&P up 23 points at 1066. Today’s moves come after a robust Q3 GDP print (+3.5%) and official end to the recession rekindled investor confidence and risk-seeking sentiment alike. But will this rally last?

In my humble opinion, the foundation of the recent rally will primarily depend on labor and housing. Despite many signs of economic recovery, the labor market is struggling to keep up. The unemployment rate continues to tick up (now at 9.8%, forecasted to be 9.9% next week), and while Nonfarm Payrolls are increasing they are still negative, indicating further jobless losses throughout the nation. In addition to labor, the upward momentum in US economic data has stalled; September housing growth essentially came to a standstill. As the housing industry is a huge producer of income and jobs in our economy, a freeze in its recovery will only further dampen confidence (and thus equity investment).

Not to be the pessimist (I know I’m being a pessimist), but a few other factors point towards a correction:

1) Risk Aversion: In general, speculators take less risk into year end. We can expect many to opt out of equity purchases come November and December.

2) Profit Taking: Equities have come a long way since the Bear Stearns fiasco in March. In accordance with the above, investors will want to cash out before year end, taking profits where they can.

3) Treasury Purchase Program On Halt: The Fed plans to pause buying Treasuries soon which will cause Treasury prices to fall. Lower prices (and thus higher yields) will attract investors, causing them to exit equities and pile cash into these safer assets.