September 3, 2008 Stock Market Recap

Back to Reality

The stock market is capable of doing stupid things--in fact of repeating some of its mistakes time after time. The one deserving in a place in the "hall of fame for idiocy" is the so-called relief rally. There's a child's joke based on the same idea: "Why does a moron stop hitting himself on the head with a hammer?" "Because it feels so good."

And therefore, since Gustav played out something close to a best-case scenario in contrast to the dire expectations most of us experienced, it was virtually inevitable that the market would celebrate with some kind of a rally. And it did. It was also virtually inevitable that the rally would collapse. And it did.

Now that we are apparently back to reality, the market will do what it was going to do anyway. And that was... let's see, what was that? Come to think of it, my commentary on Friday evening was laced with remarks like this: "These [market] changes are beyond halts and turns that signify genuine differences in preferences. If anything these wild pirouettes smack of incoherence. It is impossible to believe the market is expressing opinions that can be taken seriously. With this is mind, we have no choice but to be patient about letting the market calm itself and return to some semblance of rationality."

Among my Friday lamentations were the following remarks, "You can't really expect the market to be rational against a background like this. You have the two major political conventions encroaching on one another... You have one party acquiring a VP with experience, apparently hoping to cancel out the inexperience of its own leader, in case inexperience should turn out to be bad. You have the other going the opposite by acquiring a VP with inexperience, to protect itself against the possibility that experience will turn out to be bad. You have one group acquiring a lady VP in the hope of stealing those members in the other party who are disappointed by the loss of its own lady. From which we can only infer that it is gender not political issues that really matter."

It seems to me that the outcome of the election will have profound effects on the stock market (although I have no idea what that outcome will be or what the market prefers). We have Obama calling for change, as if change for the sake of change is of deep value. Maybe he is referring to innovative thinking (often referred to as "thinking outside the box"). But prospective VP Palin has already used the "box phrase" as a part of her repertoire. They both can claim immunity to the blunders of over-experience.

As investors all we can do is let it unfold, size up what they are made of and pay close attention to what the market prefers--or what it is afraid of. But in the meantime we can't forget that the market is often wrong in its judgments.

True to form, the market started the day with a zealous relief rally. And finished the day limping in a puddle of red mud.

Some downgrades today as the Russell continues to stand out.