Stock prices rose sharply this past Tuesday, led by big gains in financial stocks, after Lehman Brothers announced that it plans to raise capital via an offering of 3 million shares of convertible preferred stock. Equities also got a boost from a report that members of the U.S. Senate reached an agreement Tuesday morning to reopen discussions on ways to resolve the ongoing problems in the housing market, including ways to prevent further home foreclosures.
Also on Tuesday, Treasury Secretary Henry Paulson proposed the biggest overhaul since the Great Depression of rules governing the financial markets, saying that the Federal Reserve should expand its oversight of financial services beyond banks.
Yet, there's been practically no change in the factors that ultimately determine the direction of stock prices. For example, a preponderance of economic data indicates that economic growth in both the U.S. and many other regions of the world will continue to slow in the months ahead. Of utmost importance, recent earnings reports from a sample of large U.S. companies indicate that corporate profits likely declined further in the first quarter of 2008, after falling 3.3 percent (on a sequential quarterly basis) in the fourth quarter of 2007.
Meanwhile, Bloomberg L.P. reported earlier this week that total auto sales in the U.S. fell 13.7 percent in March, after declining 7.8 percent in the prior month. Sales from the Big 3 U.S. auto manufacturers fell for the tenth consecutive month, declining 17.6 percent in March compared to the same period a year ago.
Ford's head of marketing, Jim Farley, said of the downturn, "I'd like to be able to tell you that the worst is behind us, but I really can't give you that assurance." Farley went on to say that the second quarter could prove to be the year's most difficult.
The outlook for the airline industry is also beginning to worsen due to persistently high jet-fuel prices, which have risen 63 percent over the past 12 months. The International Air Transport Association (IATA) announced on Tuesday that it expects profits of U.S. airlines to decline 36 percent this year and to possibly fall into negative territory if the U.S. economy continues to deteriorate.
Perhaps the most worrisome concern that investors must confront is the outlook for the employment market. In addition to continuing job cuts in the residential construction market, builders of industrial and commercial complexes have begun to reduce their workforce as a result of the recent slowdown in the non-residential construction market.
This past Tuesday, the U.S. Department of Commerce reported that spending on non-residential complexes fell for the third month in a row during March.
Recent job cuts in the financial sector also bode poorly for the employment situation.
Federal Reserve Chairman Ben Bernanke commented on the latest economic data in his testimony to the U.S. Congress's Joint Economic Committee on Wednesday, acknowledging for the first time that a U.S. recession is possible as homebuilding continues to weaken, unemployment increases, and consumer spending slumps.
"It now appears likely that real gross domestic product will not grow much, if at all, over the first half of 2008 and could even contract slightly," according to Bernanke.
Meanwhile, the International Monetary Fund (IMF) cut its 2008 forecast for global growth on Wednesday and said there's a 25 percent chance of a global recession, citing the worst financial crisis in the U.S. since the Great Depression.
So, I strongly suggest that you refrain from getting too excited about the big rally in stock prices this past Tuesday. Although my research indicates that recent government actions to alleviate the fallout from the subprime mortgage debacle will likely provide a floor of support for equity prices, I've yet to uncover any major catalyst that would lead to a sustainable stock market rally over the near term.
On the contrary, my models indicate that stocks will likely trade in a volatile sideways pattern over the next couple of months. Therefore, please be cautious if you are thinking about aggressively buying stocks at this time. Still, there are some opportunities in certain sectors of the market. Go here now to find out which sector presents the most profit potential right now.
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