What the stock market did today and will do tomorrow

on an up day say greed won, on a down day say fear won

As a taxpayer, I just wish that the Feds had waited another week before announcing that it was going to buy equity stakes in distressed banks -- today's "rally" means that taxpayers will wind up paying a lot more for those stakes than they would have if we'd waited until those institutions' stock prices were even lower.

The S&P 500 index closed today at about 1000. Assuming a 3% inflation rate in 2009, this would imply S&P 500 earnings in 2009 of about $62.5 (Jeremy Siegel's Rule of Nineteen), and an earnings contraction of about 19% over 2008. In the last fifty years, the worst annual earnings contractions have been 17.5% in 1975 and 15% in 2001. If 2009 is not much worse than 1975 or 2001, the market doesn't seem to be markedly overvalued today.

Hi Barbara,

Keep focusing on how the financial crisis on Wall Street is hitting the real economy on Main Street (and vice versa) and how the crisis is spreading across the globe. Your coverage of Main Street issues was quite good. I am not an empirical scientist. So, I couldn't tell you much by way of professional ideas about 'market wrap' stories. But I think you're already doing a really good job of stitching together the disparate empirical data to give a coherent picture of the markets, while yet avoiding any idealogical bias.

On another note, I think the Dow's comeback with a more than 11% surge yesterday is too unrealistic. This is not the way it is supposed to be, because the solution announced by the European countries, while better than buying the toxic mortgage assets with $700-billion that the Treasury had originally planned on, is still not the best solution. There are many questions remaining unresolved about equity injection (check out the blog-post of Professor Gary Becker at the University of Chicago). It seems to me that the market is still finding its way towards a viable solution, and it would not be done till at least the new year, when a new government would come into office. This might be a qualitative explanation for why the volatilities are expected to remain high (as you have reported from Professor Robert Engle in your article Wall Street's Big Bounce: Don't Start Cheering Yet).

Cheers,
smale25

Keep focusing on volatility like you did yesterday. Whether the market swings are up or down, they are still telling us the same story. There is a lot of uncertainty among investors. This makes it difficult for anyone to make money, whether you are long or short. But if you believe the period of high volatility is ready to subside, it might be a good time to sell some options. It would be interesting to compare implied volatility in the options market (I think this is what VIX tracks) to the actual volatility of the last few weeks.

Hi Barbara,

I just read your article 'Wall Street Takes a Break: A Return to Normalcy?' Great job again! Your second paragraph sets up the theme and then the last sentence provides the counter-point very well.

I was just wondering, if the second sentence in the second paragraph could have been, "In recent days, however, ...". Also, you might be interested in Doug Henwood's 'Wall Street'. It is freely down-loadable from the internet. Between pages 128 and 134, Henwood records the day-to-day 'market-wrap' for one week in 1994.

You might want to keep some good references like Jeremy Siegel's 'Stocks for the Long Run' and Burton Malkiel's 'Random Walk Down Wall Street' close by. They might help you to work-in some words of sage-advice to the reader (I presume you are addressing a general audience). Or perhaps to obtain some new insights about the markets' behavior.

I am not an expert on the best way to present empirical information about the markets. But even I can appreciate good writing about the financial markets when I see it. Keep up the great job!

Cheers,
smale25