The stock market is taking a breather
Written on December 27, 2008
The stock market is taking a breather.
The wrenching ups and downs of the past few months have given way to a certain tranquility in December, offering Wall Streeters a break from the world-is-ending days of just a few weeks ago.
From Labor Day to Nov. 20, the stock market plunged 40 percent. From the government takeover of Fannie Mae and Freddie Mac and the bankruptcy of Lehman Brothers in September to the credit freeze in October and dreadful economic reports in November, it seemed the financial system was collapsing.
Now, the government has taken aggressive efforts to shore up the economy, and a recession has been factored into stock prices. The wild daily swings common in October and November have eased. Not even the drumbeat of more bad economic news seems to spook investors lately.
"There’s a sense that this market has bottomed," said Dan Deming, a trader with Strutland Equities in Chicago.
Pronouncing an end to a raging bear market is tricky. Some traders and market strategists are starting to peek out of their bunkers, and they aren’t unhappy with what they see.
The Dow Jones industrial average remains about 26 percent below its level on the Friday before Labor Day, while the Standard & Poor’s 500 index is down about 32 percent during the same time period.
Still, the dramatic swings appear to be leveling off. Consider these numbers:
•The average daily change in the Dow has fallen from 340 points in October to 206 this month.
•The Dow climbed above 8,000 on Nov. 21 and has now traded between 8,000 and 9,000 for a month. In September-November, the Dow crossed a 1,000-point threshold — either up or down — 19 times.
•The Dow’s gain or loss has been less than 100 points in six of the last nine trading days. That happened only three times in November.
Nobody is saying the bulls are ready to run again on Wall Street. Investors are still contending with a dreadful economy. But investors are greeting bad news with a better attitude.
"You’ve seen it on a number of days now for about two weeks where the market has absorbed bad news and either closed the day a little bit down or some days a little bit up," said Quincy Krosby, chief investment strategist at Hartford Financial Services Group Inc.
Compare that with the 23 trading days from late October to late November, when the S&P 500 jumped 25 percent in six days, lost 25 percent the next 12 days and then shot up 20 percent in five days.
Wall Street veterans point to several reasons behind the relative tranquility. Trading typically slows at the end of the year and volatility declines. Many investors who sell late in the year do so for tax reasons. This year, they may have sold during the market’s plunge in the fall. Hedge funds have completed selling they needed to do to meet redemption requests from their clients. Most important, though, has been the absence of any unexpected bad news. No Wall Street firm has failed, and the economic news, although awful, is now being anticipated.
What happens in January, though, will be crucial. Wall Street typically looks six to nine months ahead. So stocks start moving up well before a recession ends. Investors will be looking for signs the economy might be starting to mend.