What is holding up the stock market?

[CoffeeCat]

I don't want the stock market to crash, but I'm wondering why it hasn't and what is propping it up?

Most of the financial talking heads on CNN, MSNBC and CNBC are telling us that now is a "great buying
opportunity." How is it possible that they see the market going up in the near future?

Someone correct me if my assumptions are wrong--but I see lots of economic pain and suffering on the
horizon. The very near horizon. I see a steady downward spiral.

Holiday sales were terrible, and many are anticipating horrible Jan/Feb/March retail sales. Another
major housing bubble is set to burst--as many ARMs re-set--creating high mortgage payments that many
will not able to afford. In fact, I've seen many economists predict that this housing bubble will
be much more devastating than the bubble caused by Fannie/Freddie loans that people couldn't afford.
This bubble contains many more homeowners, who anticipated that the economy would continue to hum along.

These homeowners could afford higher payments--if all variables remained constant. Now, many have lost their
jobs, didn't get anticipated raises/promotions--and those high payments are now out of reach.

Also, unemployment is set to rise. We're all ready seeing major companies--such as IBM--announce
layoffs. People are not spending money. Sales are drastically down on everything--from Toyotas to toys. Many
more will lose their jobs, and this will only decrease spending further.

Frankly, I see a pretty desperate picture for 2009.

Why does the DOW seem to be holding steady? We've had significant losses, but not a crash.

Am I overly pessimistic about my assessment of the economy? If not, why does the DOW and the stock
market in general seem to be holding its own?

And how can the financial talking heads still get away with suggesting that now is a great time to buy--as
they predict sunny skies ahead?

[Veritas_et_Aequitas]

1. A few things are proping it up right now

1) Investor confidence - It's lower than it was previously, but investors have found reasons for hope. The (eventual) government bridge loans granted to the Big Three, some hope that China will be able to consume enough to keep us afloat (it won't happen), and the fact that a lot of companies are keeping a steady hand at the tiller has kept people in the market. Also (perhaps the most important reason) Obama looms on the horizon and with him comes that new fangled hope and change we've been hearing about.

2) The banking system is still largely intact, although lending has slowed down considerably. People can still get paid which is useful in running an economy.

3) As much as I dislike Bush's economic team, now that they've woken up, they haven't completely screwed up. Bernanke adjusted the short-term and long-term interest rates to encourage banks to lend and to invest less in Treasuries. It seems to be working for now, but it's only a stop-gap measure.

But remember, the Dow Jones isn't the sole (or even the best) indicator of economic prosperity. And there are still plenty of things that could go wrong (like the pending currency crisis). We'll see in 2009.

[Yes We Did]

2. Duct Tape & A Ton Of Hope. n/t

[doc03]

3. Where's the stock market crash? What the f---- are you smoking

my 401k shows about a 30% loss and I was only about 50% in equities. The stock market anticipates the state of the economy 6 months to a year in the future. I think things will start picking up in the 3rd or 4th quarter of 2009. The lower fuel prices and the coming tax-cuts will put a lot more money into the system and with the stimulus spending I think things will pick up.

[aikoaiko]

4. Lots of people will never get out or sell off.

I think the buzz phrase is the market has capitulated.

[GoesTo11]

5. In theory

stock prices reflect the "expected net present value of future cash flows" over the life of the company because a share of stock literally entitles you to a share of profits (either as dividends, buybacks or if the company is sold).

Stock prices dropped 40% or so. That's a lot. Should expectations about cash flows drop even more? Well, losing profits for a couple of years and contracting during that time and having minimal growth for a couple years after might add up to about 40% decline in value compared to business as usual. It could drop more, but I doubt it will drop close to zero. Why? Well, one company's stock can never drop below zero. In tough business climates, some stocks will drop to zero and the companies will disappear, but then the others will be profitable - they'll have less competition after all. So maybe their share prices will go up a little.

Right now, there's a lot of uncertainty. We could get news that knocks expectations down, we could get news that knocks them back up (e.g., the stimulus package works). No reason to think the current prices aren't a good best guess.

[roamer65]

6. The Federal Reserve's 'Qunatitative Easing" policy.

A zero fed funds rate and massive currency creation. The exact reverse of what was done during the Great Depression.

[Warpy]

7. It's up right now because there aren't that many places for

insanely rich people to put their year end dividends. They're buying what they think are bargain priced stocks along with the usual strategic stuff.

It's not going to last, I'm afraid.

[Wiley50]

8. People praying against hope their 401ks will recover the losses

If they pull their money out they will eat that 40% loss

It's not a complete loss until they sell

People are praying the stocks they are in will recover some of the value
if they just wait long enough

It's a fool's gamble but it's the only hope

Most people can't afford to eat the loss. Too close to retirement.

It's times like this that make me appreciate my poverty

"When you ain't got nuthin' you got nothin to lose"

[GoesTo11]

10. Are you shorting the market?

Do you believe what you said enough to go for it?

I'll be the first to admit that I lost a bunch of money. I tell people that if I knew enough about the market to see this coming, I would have made a fortune by shorting it 6 months ago.

[pa28]

9. I think you are right about the final result. But bear market rallies are normal.

If you look back at the stock market crash starting in 1929 it was the same pattern. Hysterical plunges punctuated by false optimism and short term rallies based on government promises and "bargain hunting". In the end though the bear stripped every bit of meat off the bone taking over 90% of the overinflated stock equity of that year. It seems strange that the market is not rational enough to see the scale of the disaster and immediately re-value itself even if the truth has grabbed it by the lapels. Unfortunately, the market itself decides what time is the right time to flush itself down the toilet - that's the law. BTW If somebody has figured out the finer points of this law please give me your phone number. :hi:

Maybe some of the factors big players are looking at; a stimulus plan coming up providing some short term cover for buyers, there's the "January effect" which is in play(especially after a bad year), apparently a turnover from treasuries to equities and perhaps the belief that Obama might be able to place his hands on the economy and perform some kind of miracle. There's the potential for a really powerful rally if you also throw in the "oversold" condition of the market. In the end I agree with you though - it'll just be another rally for Wall Street to short the $*&^ out of.

Probably not what people want to hear but maybe they should at least study and consider the idea that the dow at 4 or 5k might be a fair price.

[ThomWV]

11. My son and I bought into a S&P Index fund, we are up about 13% in thelast month

We bought on the 4th of December and again yesterday.

[Tierra_y_Libertad]

12. Right now, they're like gamblers who are trying to recoup their losses.

Just one more bet...just one more bet...