The Markets Are Festive — But Beware the Hangover

The view from the bottom is getting pretty rosy. Consumer confidence, durable goods orders, manufacturing activity, housing sales — all up Friday, in one way or another, and the non-vacationing investors who shuffled into work on Wall Street for the last trading Friday of 2001 duly nudged all indexes north on the late Christmas present. Not only have we hit bottom, went the knee-jerk wisdom — and not only was it not so bad — we now look to have begun our trip back to the top.

Just look at housing, Americans' economic insurance policy/bungee cord throughout this downturn (low interest rates + more mortgages = extra wealth for consumers). The Commerce Department reported Friday that new home sales were up a whopping 6.4 percent in December, and the National Association of Realtors said existing home sales rose 0.6 percent. So far, so good.

Durable goods orders — a handy indicator not only for consumers? long-term confidence but also for the capital-spending mindset of manufacturers — fell 4.8 percent overall in November. But that's but a small piece of October's 12.5 percent hike, and when you take out declining defense orders (the war is slowing down a bit) domestic-front orders of heavy equipment, appliances, and the like were up 2.7 percent. And even the manufacturing-gauging Chicago Purchasing Managers Index edged up a smidge to 41.4 from 41.1. That's two straight months of rising PMI and non-defense durables orders, which bodes well for December, which bodes well for the recovery, because it won't really get going until manufacturers start making capital investments again.

And consumer confidence — oh, consumer confidence. In the day's real headliner, the Conference Board reported that its consumer confidence index staged a whopping advance to 93.7 in December, up nearly 10 points from a revised 84.9 in November and about the same amount more than forecasters were expecting. Woo-hoo!

A little naysaying may be in order here. Well, not naysaying, exactly — the recovery will come, it always does — but a little holding of horses. Housing is good, sure, but housing has been good all year, and we still got a recession, didn't we? Durable goods orders are up, sure, but they're still very very low compared to expansions past. And the Chicago PMI may be inching up again, but if you believe in these numbers, 50 is the point when contraction turns back into expansion, and this trend line doesn't look to arrive there anytime soon.

And consumer confidence — 93 is better than 83, but it ain't at the salad-days levels of 120+ yet. Consumers, remember, were preternaturally confident all through last spring, and that's when the recession started. They were confident that the recovery was going to start late last summer, until it didn't. Suddenly consumer confidence is supposed to presage the quick recovery we've been waiting for all year? (And if they're so confident, why did they all buy their Christmas presents at Wal-Mart?)

Mood-of-the-nation-wise, December had a few things going for it that may not last. The war in Afghanistan went swimmingly, with the Taliban crumbling at every turn and al-Qaeda troops scattering to the four winds (and some U.S. detention camps). The stock market — no doubt drawing heavily on the feel-good war news — rose about as fast and as steadily as the Taliban fell. And for those in a reflective mood, who couldn't feel confident about 2002 being better than 2001? Why, it's just got to be.

Funny thing happens after New Year's, though. Once that first resolution goes out the window, the sheen of optimism starts to dissipate, and the new year starts to feel a lot like the old one — new number, same world, same problems, same fears. And a hangover to boot. The stock market, anticipatory beast that it is, has already started to put on the brakes; having regained 10,000 (a few times) in the past two weeks, the Dow seems positively allergic to the air at 11,000, and the NASDAQ, despite a 3-day rally to close the week, hasn't even been able to hang on to the 2,000 mark. Yes, the economic bottom is in, which means the indexes shouldn't see much in the way of big selloffs for a while, but this optimistic bottom is still closely matched with a very wait-and-see top.

Yes, we do appear to be ready to start crawling back from the depths of this economic (and psychological) recession we're in. The business cycle and the Sept. 11 amplification of same may have done its worst to the economy, at least for the foreseeable future (and excluding, of course, a dirty-bomb attack in Times Square or some such). Consumers and investors alike are looking to Baby 2002 for a fresh start and a fresh expansion.

But it still looks to be about six or nine months before this baby learns to walk.