The media made a big deal of the fact that the DJIA rose above 9,000 for the first time in nearly eight months. The index was under 6,550 in early March, do the advance has been 38% since then, but the index is still well below 14,000 which it hit in October 2007. The Dow would have to rise 54% to get back to that point. That is an extraordinarily depressing figure given how far the market has already come and how hard it will be for it to rise to that number in what is still a harsh economic environment.

There are obviously a number of good reasons for the run-up, but there are an equal number of reasons that it has gone too far. Housing has begun to make what could only be called a most modest recovery, or, at least it has created a credible mirage. Earnings have been better than expected. A great deal of that improvement is because of expense reductions. Millions of people have been fired and capital spending cut to unprecedented levels. The stimulus package may take hold as the year goes by, at least according to many economists, the Treasury Secretary, and the chairman of the Fed.

Housing is still as badly off as it has been in two or three generations even with a tiny improvement. The fact that the supply of homes on the market is just above nine months may be considered a slight jump over that figure three months ago, but it still means that it could take several years to burn off that inventory with a simultaneous improvement in prices. Unemployment will move above 10% soon, and the shrinking base of consumers will continue to hurt businesses which rely on consumer spending and banks that are facing rising credit card default rates.

Earnings probably will not improve as much in the third and fourth quarter as they did in the quarter that just ended. A lot of the positive news about earnings at firms including Starbucks (SBUX), Caterpillar (CAT), and The New York Times (NYT) was due to layoffs and debt reductions. Many of the layoffs occurred late last year, so the comparisons are going to stop being beneficial as 2009 wears on.

The major challenge to the stock market’s health could end up being the speed at which the $787 billion stimulus package is helping the economy. Even the government admits that much of it benefit from programs will not take effect until 2010. That leaves a number of businesses and industries in a position where they will have to stand on their own without a “federally improved” GDP growth rate.

The market move over the last four months has been swift and relatively easy. The drum beat of good news got a bit louder as the weeks went by. The pace at which good news will be coming is likely to slow considerably.

Douglas A. McIntyre

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